NPV: Can an NPV of investment be negative?

scarter

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Hello and thank you for reviewing this post: Any insight would be grateful on this end.

Can an NPV of investment be negative?
Is there a calculator on line that can check my work for a investment building with cost 35mil, straight line depr basis to zero over ten year, own for 12 years sell it 6 million. Generate revenue of 8 mil per year with expenses of 3 mil. Taxable bond paying at 8% and marginal tax rate of 25% What is your NPV of this investment?

I started with NATCF to figure out Net after tax cash flow.
I followed on with NPV:

Years 8% discount NPV
0- -35M = -35M
1-5 4.625M with using table NPV 3.993 = 18.567M
6-10 4.625M 6.710-3.993 = 12.56
11-12 3.75M 7.536-6.710 = 3.0975
total = -.87
you have a 12 year salvage value
6 M - 6M(.25) = 4.5Million
Do you add the 4.5 M to -.87? for 3.63NPV

Any insight...

Thanks

Scarter
 
Re: NPV

Are you SURE you need to pay taxes on the salvage sale of captial equipment?

"Taxable Bond paying 8%" -- What is that? Is this the pruchase mechanism? More details about it?
 
Re: NPV

Hi and thank you for replying that may be why I am getting a negative NPV.

The question:

Your company can invest in a new building that cost 35Million. The building can depreciate on a straight line basis to zero over ten years. You will own the building for 12 years and then sell it fo r6 million. You can expect the building to generate 8 million additional cash revenues and additional cash expense of 3 million. You company's invest is a taxable bond at 8% interest per year. Your company has a marginal tax rate of 25% What is the net present value of this investment?

I used the Net after tax cash flow as you will have taxable income. Also wasn't sure what to do with the salvage value? do you add that back in?
Thank you been pulling out my hair on the - negative NPV.

Scarter
 
Re: NPV

I make the cash flows as following:
1: 4,625,000 : 8,000,000 - 3,000,000 - .25(5,000,000 - 3,500,000) ; 3,500,000 is depreciation
2: 4,625,000
....
10: 4,625,000
11: 3,750,000 : 8,000,000 - 3,000,000 - .25(5,000,000)
12: 9,750,000 : above + 6,000,000 (salvage value; of course you add it: it's expected CASH!)

You need a rate to "present value" these 12 flows. Like TK, I don't "follow" that 8% bond.
If all it means is USE 8% as discount rate, then present value
= 4625000(1 - 1/1.08^10) / .08 + 3750000 / 1.08^11 + 9750000 / 1.08^12
= ~36,514,296

So NPV = ~1,514,296
 
Re: NPV

I believe your second answer is correct.
This assignment is based on an annuity table
present value per year for each of t years = 1/r-1/[r(1+r)^t]

My answer was 3.63 mill using the present value table numbers which isn't far from doing it long hand.
I do not understand how you got the final NPV? did you add the salvage value?

Hope this brings a little more clarity.

scarter
 
Re: NPV

Denis,

After I posted it I figures it out Silly me

Thanks

Scarter
 
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