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Hi all. Need some help from you guys.
For NPV. How do I get the cashflow value if i were given the net contribution, fixed cost and the depreciation value instead? Do I sum up all the numbers or? Does the fixed cost have to be subtracted away?
As for interpolation, I was given two r values. After calculating the r values, does the two NVP have to be negative & positive? What if I gotten both positive NVP?
Also, if the cost of capital percentage is the same as the r value given, how do I go about it as both will give the same answer.
Thanks.
With your interpolation question you do not have to have one negative and one positive npv.However, you want the values to be reasonably close to zero in order to get a more accurate result.Not entirely sure what you mean with other questions.
If there is one +ve and one -ve value you can INTERpolate the NPV (i.e. estimate it between 2 values); if both are +ve (or both are -ve) you would be EXTRApolating (which is inherently less accurate). (If you haven’t seen a graph of IRR plotted against r browse the internet for one.)
Regarding cash flows: contribution (revenue less variable costs) is relevant cash flow, depreciation is NEVER a cash flow (so always ignore in DCF techniques and indeed any decision-making), an allocation or apportionment of a fixed cost is NOT a cashflow (so ignore) – but a fixed cost that is incurred (or saved) as a result of a particular course of action will be relevant (so include).
I do not understand your last question.
Regarding the last question, what i mean is that can the cost of capital percentage be the same as the r values?
Also, how do I calculate NPV if cashflow isnt given in the question?
There is no reason why the cost of capital cannot be the same as the internal rate of return. If using the cost of capital gives NPV = 0 you know you’ve found the IRR – so no need to calculate NPV at another discount rate.
If amounts are not given as cash flows there must be sufficient information to determine them if you’re required to calculate NPV. Perhaps you can spell out such a question since I cannot imagine what you mean.
The question I did indicate that
– No cashflow given
– Initial outlay of $520
– Net contribution of $300
– Additional fixed cost estimated to be $160
– Salvage value of $100 in 5 year times
– Company use straight line basis method for depreciation
– cost of capital is 12%
– ignore taxationSo do I add or subtract the depreciation in the NPV?
You do neither. As Kim says, depreciation is not a cashflow so you ignore it in the NPV calculation.
Depreciation is only used when calculating tax – and then it only matters what the tax allowable depreciation is, not what the company’s depreciation policy is. In this case it says to ignore taxation so that’s not relevant to this question anyway.
What you use is the initial outlay at year 0 and the scrap value discounted to year 5.
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