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Investment Appraisal Discounted Cash Flow – NPV (example 1 and 2)
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Suppose a company has an estimate of 1000 employees and raw material costing $50,000 to be used in next year. New machinery is being considered for purchase. 15 employees will work on this new equipment and $3000 worth of raw material will be used by this equipment. Electricity expense is $3000 of which $500 is consumed by the machine. Assume there is little or no depreciation.
Net Operating cash flows take out cash expenses, do these expenses include wages of 15 employees, $3000 spent on raw material and $500 of electricity.
If YES then why can’t we say NPV is expected net profit/loss for this project.
Secondly, other than depreciation can you name three other types of expenses that are not CASH expenses?
Electricity and raw material are included because they are costs that will not be incurred if the machine is not bought.
Employees wages will be included if they are extra employees – your question does not make it clear whether they will be extra or whether existing employees will find the time.
NPV will never equal the net profit/loss for the period because we discount to take account of the time value of money.
I do not know why you want to know three other expenses that are not cash! In the exam depreciation is the only one. However, even though they involve paying cash, you do not include the following: cash already spent (sunk costs); interest payment (because interest is dealt with when discounting at the WACC; the absorbing of existing fixed overheads (it is only extra fixed overheads that are relevant)
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