NPV
The net present value calculation is the best way to make a capital budgeting decision. NPV takes the incremental cash flows from a project and then discounts them to present-day dollars. This technique allows managers to not only identify the incremental cash flows associated with a project, but also allows them to discount future cash flows to present day, so as to account for the effects of inflation.
In this case, we have the following schedule of cash flows:
Cash Flow
If T-Mobile is considering a project with these flows, and the company has a discount rate of 4%, then the NPV of the project would be as follows:
Cash Flow
PV
NPV
Thus, this project has a net present value of $ -170.68. A project should only be accepted if it has a positive net present value. The reason for this is that the discount rate effectively represents the opportunity cost of capital (Brealy & Myers, 1996). This means that the 4% rate we are using for T-Mobile represents what T-Mobile earns on its ongoing business. If the project has a positive NPV, the project earns more than the existing T-Mobile business; if it has a negative NPV, the project earns less than the ongoing T-Mobile business. Thus, a project with a negative NPV should be rejected because it would reduce shareholder wealth. A positive NPV represents a project that will enhance shareholder wealth. By agency theory, managers act as agents for the shareholders, and therefore should undertake actions in the best interests of the shareholders. It is assumed that shareholders would want to pursue actions that enhance the value of their investments. Therefore, managers should approve projects with positive net present values because those projects improve shareholder wealth. Thus, because this project has a negative NPV, it should be rejected because that represents a diminishment of shareholder wealth.
Another issue facing T-Mobile at present is a possible merger with Sprint Nextel. This issue has come into the public sphere by way of comments from the Sprint CEO (ABMN, 2010). Ultimately, for a merger to take...
NPV Obviously the easiest and most error-free way of doing this is in Excel. Thus, we get the following table for the NPV calculation. Flow NPV (1-5) $2,031,369.67 Total NPV $281,369.67 Google should accept the project, because it has a positive net present value. All projects with a positive net present value add to shareholder wealth. Unless there is a comparison between two mutually exclusive projects, any project with a positive NPV should be accepted. In Google's
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