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Essay Details:
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Essay text:
(Watson & Head, ) In this case, since the Accounting Rate of Return / ROCE is 20% and its higher than the required rate of return of 10% set by HP technology, this project is acceptable and worth pursuing.
ii) The Net Present Value (NPV)
NPV= -I0 + Cn__
(1+r)n
Where; I0 is the initial investment.
Cn are the project cash flows occurring in years 1, 2, ….. , n
r is the cost of capital or required rate of return.
In this case;
I0 = Initial investment = 5,000,000
r = 10 % = 0.1
NPV = -?5,000,000 +? 2,000,000 + ?2,000,000 + ?2,000,000 + ?1,000,000
(1+0.10) (1+0.10)2 (1+0.10)3 (1+0.1)4
= ?-5,000,000 + ?1,818,182 + ?1,652,893 + ?1,502,630 +?683,013
NPV = ?656,718
NPV decision rule is to accept projects with a positive NPV...
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Common topics in this essay:
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