Introduction to Corporate Finance

322

PART 3: CAPITAL BUDGETING

example

FIGURE 9.3A NPV OF GLOBAL UNTETHERED’S PROJECTS AT 18% ($ MILLIONS): WESTERN EUROPE PROJECT

0 1 2 3 4 5

End of year

NPV = $75.3

–$250 $35 $80 $130 $160 $175

29.7

57.5

79.1

82.5

76.5

Calculator

Input Function

2nd CLR TVM

CLR WORK

CF

2nd

(^35) ENTER
–250 ENTER
Solution 75.3
80 ENTER
130 ENTER
160 ENTER
175 ENTER
NPV
CPT
(^18) ENTER
Formula B8:
–250 + NPV(B7,B2,B3,B4,B5,B6)
Net present value $75.3
Cash flow 2
18%
–250
35
80
Cash flow 1
Cash flow 0
Row
Column
Spreadsheet
1
2
3
(^4) Cash flow 3 130
(^5) Cash flow 4 160
6 Cash flow 5 175
7 Interest
8
9
A B
FIGURE 9.3B NPV OF GLOBAL UNTETHERED’S PROJECTS AT 18% ($ MILLIONS): SOUTH-EASTERN
AUSTRALIA PROJECT
The net present value (NPV) of Global Untethered’s South-eastern Australia project is $25.7 million, which means that it is
acceptable (NPV > $0) and therefore creates value for shareholders.

0 1 2 3 4 5

End of year

NPV = $25.7

–$50 $18 $22 $25 $30 $32

15.3

15.8

15.2

15.4

14.0

9-4b PROS AND CONS OF NPV

The NPV method solves all the problems we have identified with the payback and discounted payback

rules, as well as the problems associated with decision rules that are based on the accounting rate of

return:

■ The NPV rule focuses on cash flow, not accounting earnings.

■ When properly applied, the NPV method makes appropriate adjustments for the time value of money.