Calculating NPV - Ignoring Financing

by Asif Jaria
(Texas, USA)

How do you calculate net present value ignoring financing?

Comments for Calculating NPV - Ignoring Financing

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Nov 20, 2009
Calculate NPV Without Financing
by: Dee Reavis

When you calculate NPV you have to decide on a discount rate or a hurdle rate. Normally, you would take into account the cost of borrowing in the discount rate. If you don't want to consider the cost of financing, you can subtract that cost from your discount rate.

Example:

Financing cost 7%

Expected profit 5%

Discount rate 12%

New discount rate
w/o financing 5%

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npv analysis

by Greg Street
(Denver, CO)

Initial Investment $95000

YR Cash Inflows
1 $20,000.00
2 $25,000.00
3 $30,000.00
4 $35,000.00
5 $40,000.00

12% Discount Rate

My NPV is $9080.60...so what does that tell me?

Answer

NPV Analysis



When you chose a discount rate of 12%, that was the hurdle that you set (It is sometimes called the hurdle rate). What that means is that if your NPV is positive, you have achieved a return of more than 12% on your investment.

Now if you had chosen 16% for the discount rate, you would have calculated a negative NPV. So that would mean that you would not accept the investment if you required a minimum return of 16%.

If you were comparing several different projects, the NPV Analysis would go a step further. You would want to chose the one that had the highest positive NPV. If you still had money left, you would then chose the second highest positive NPV, etc.

You could have calculated this easily at NPV Calculator Click Here.

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Sample NPV Analysis

by Anonymous

Is it good to have a high NPV?

Answer

If your NPV Analysis is based on positive cash flows then it is good. If you have not paid attention to your negative signs and you have high investment costs or net negative cash flows, then a high NPV can be bad.

The higher the real NPV is, the higher the IRR is going to be. (IRR can be looked at as interest return that you are getting) Just like you would want as high a return on your savings(investment) as possible, you want as high a NPV as possible.

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Negative NPV

by ANDREW
(NEW YORK)

What is a negative NPV?

Answer

A negative NPV means that the positive cash flows did not exceed the negative cash flows, based on the discount rate or hurdle rate that you used.

If you are comparing cash flows you want to chose the one that has the least negative or most positive NPV to maximize your economic benefit.

Try it out at NPV Calculator here.

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