NPV of a Building

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njrocket

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It costs $800,000, it will produce an inflow after operating costs of $170,000 a year for 10 years. Opportunity costs of capital is 14%..Whats the NPV of factory, and what will the building be worth after the end of 5 years?

I understand it produces a set 170,000 a year so you could just run the present value after each year. But is this a shorter or way to do it? What would the answer be either way? Thanks alot.
 
I believe an NPV is the net profit value. Label threads like this better if you want to speed up responses, most tutors may not know what an NPV is, but know how to do the problem. I had to look it up and then said, "Oh, that's easy"

NPV = net cash flow - initial investment

so, net cash flow is 170k/yr for 10yrs

initial investment is 800k + interest "Opportunity costs of capital" - whatever

as for the value at 5 yrs, That can be calculated via depreciation. Straight line depreciation. You need some info for that. some numbers I saw stated 39 years for straight line depreciation, that is to say 800k will goto zero after 39 years. It depreciates yearly at a rate of ((800,000+tax)/39)$/yr
 
njrocket said:
It costs $800,000, it will produce an inflow after operating costs of $170,000 a year for 10 years. Opportunity costs of capital is 14%..Whats the NPV of factory, and what will the building be worth after the end of 5 years?

I understand it produces a set 170,000 a year so you could just run the present value after each year. But is this a shorter or way to do it? What would the answer be either way? Thanks alot.
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Well Joel, I would have jumped at NPV = Net Present Value
So 170000(1 - 1/1.14^10) / .14 = ~886,740 = PV of factory
IF it cost $800,000 (assuming "it" is factory!), then a good deal...

I guess "at end of 5 years" could mean 5 more flows at 170,000, so worth:
170000(1 - 1/1.14^5) / .14 = ~583,624

...in other words, Rocket, do you know what you're asking? :shock:
Can you CLARIFY? I and Joel are getting depressed :cry:
 
"it" is the factory i'm sorry. NPV is net present value. With the following information, Factory costing $800,000......Inflow after operating costs of $170,000 a year for 10 years........Opportunity cost of Capital of 14%........What is the Net present value of factory, and what will the factory be worth at the end of 5 years? Thanks guys!
 
the main question i have is basically, when i do the calculations to get the present value, 886, 739.66.....in order to get the Net Present Value, do i subtract the intial cost of the building $800,000....to get a Net Present Value of 86,739.66?? Thanks for the help guys
 
I would guess not since that number seems kind of low for a thing called "Net present value"
 
njrocket said:
the main question i have is basically, when i do the calculations to get the present value, 886, 739.66.....in order to get the Net Present Value, do i subtract the intial cost of the building $800,000....to get a Net Present Value of 86,739.66?? Thanks for the help guys
Click to expand...

Hi NJrocket

Your assumptions are correct in finding the value for NPV ( Net Present Value ) which it turns out to be $86,739.66 in your problem solution

NPV is a financial metric used to evaluate mutually exclusive investment projects. NPV function in MS Excel is a bit confusing as it only provides the Sum of Present Value of Net Cash Inflows discounted at the discount rate. To get NPV with MS Excel you would need to add the Cash Outflow from the NPV function result but this cash outflow is negative in your case -$800,000

The other financial metrics most commonly used in Capital Budgeting besides NPV are

2. IRR ( Internal Rate of Return )
3. MIRR ( Modified Internal Rate of Return )
4. PBP ( Payback Period )
5. DPBP ( Discounted Payback Period )
6. PI ( Profitability Index )

For your project the values for these metrics are as follows


NPV $86,739.66
IRR 16.73%
MIRR 15.37%
PBP 4.71 ( 4 years and 9 months )
DPBP 8.22 years ( 8 years and 3 months )
PI 1.108

An IRR or the internal rate of return is the investor's required rate of return, if IRR is higher than the Hurdle rate or Discount rate (14% in your project) thus it will make it a wise investment to put money in buying this factory

At IRR the NPV is zero,
If hurdle rate or discount rate is higher than the IRR, NPV will be negative and it won't make sense to invest in the project
If hurdle rate or discount rate is lower than the IRR, NPV will be positive and it will make good sense to invest in the project

Payback Period is the number of years required to recoup the initial investment ( $800,000) without considering the time value of money or in other terms without discounting the net cash flows. In your scenario, the investment will pay for itself within 4 years and 9 months

But rarely we use Payback Period , instead we prefer to use Discounted Payback Period which is the number of years required to recoup the initial investment ( $800,000) while discounting the net cash flows at the discount rate (of 14% in this case ). In your scenario, the investment will pay for itself within 8 years and 3 months

Profitability Index is a ratio of Sum of Present Values of Net Cash Flows over the Initial Cash Outlay, if Profitability Index is greater than 1, it is considered a valued investment. At Profitability Index value of 1, the NPV is zero
If profitability Index is less than 1, than it is a loser's proposition to invest in the project

If you would like to know the mathematical equations or formulas, do let me know
I can also tell you how to write formulas in MS Excel for these metrics

:)
 
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