Cardinal Health
The first project is for Micron Technology. The net present value analysis will be used to evaluate this project. The net present value (NPV) technique involves discounting future cash flows to present dollars, to take into account the firm's opportunity cost of capital. As a basic rule, projects that have a positive net present value will add value to the company above and beyond existing operations. All such projects with a positive NPV should be accepted, while projects with a negative NPV should be rejected.
There are a few different approaches to calculating the net present value, but they are all fundamentally the same, based on the principle of discounted cash flow analysis. The first flow is the initial cash outlay. Because this particular cash flow is made today, it is not discounted. This is because payments made today are already in present value format. Future cash flows, however, must be discounted by the discount rate, which in this case is 9%. The formula for NPV is as follows:
Source: Investopedia (2012)
The net present value for each cash flow can be calculated individually, or with the NPV function on Excel. The following example uses both methods:
Year
Flow
-2225000
350000
939000
720000
500000
900000
PV
-2225000
321101
790338
555972
354213
584938
NPV
381561
or
2606561
381561
d
0.09
The final NPV of this project is $381,561. This means that the project adds value to the company. Thus, it is recommended that Micron management accept this project.
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