Loan modification NPV calculation

by Jackie Nguyen
(Orange, CA, US)

My loan modification was declined due to NEGATIVE NET PRESENT VALUE. I do not understand nor anyone from Wells Fargo can explain to me how the Treasury Department come up with this result and decline my loan mod application. Wells Fargo is prepared to give me a loan mod at 3.5% interest rate, but when they submitted to the Treasury, the Government declined it due to the reason above. Can you help me to understand what number or criteria used to do this?

Jackie Nguyen

Answer

It is hard to give you an exact answer because you gave me very few numbers. The following are some reason that you might have gotten a negative npv:

a. The max payment that the bank can give you is 31% of your gross income. If that amount is to low to permit the bank to have a reasonable interest rate (for them), then it will be a negative npv.

b. It may be considered a negative npv if the appraised price of the home is high enough that a sale will yield enough to almost pay off the loan without a significant loss to the bank or the homeowner.

c. Other debt service may reduce the amount available for the modified loan payment as discussed above in a.

You have up to 30 days to protest the negative npv. Your best grounds would be to find some error in the inputs to the calculation. Ask the bank for the details.

NPV For A Project With Multiple Cash Outlays

Is it possible to apply NPV to a project with cash outlays over the first two years and incremental cash flows begin in year three?

NPV Calculation

by Anonymous

In an instance where cash flows are zero for a number of years are there any special considerations?
Example:

Initial Outlay (100,000)
Year 1 0
Year 2 0
Year 3 0
Year 4 0
Year 5 200,000

Excel returns an answer of 18,690.27 but I'm think that its wrong any advice.

Answer

There are no special considerations for this NPV calculation.

You did not provide a discount interest rate, but a small calculation yields 11%.

If you put your numbers into my NPV Calculator calc you will get the same answer after rounding.

Now if you don't trust electronic answers we can try the pre-computer method.

The formula for the NPV calculation would be:
NPV = -Po + P5/(1+i)^5
= -100k + 200k / (1.11^5)
= -100k + 200k / 1.685058155
= 18,690.27

You can go here to use a NPV Calculator calc.

Dee Reavis

NPV for cash flows that last forever

by Mario
(Raleigh, NC)

How do you calculate NPV for cash flows that "last forever"?

Answer

This is called an annuity in perpetuity. The equation for NPV reduces to NPV=(Cash Flow)/i as the cash flows approach zero. This of course assume that the cash flows are a constant amount. So if you have a cash flow of $1,000 into perpetuity with a discount rate of 10% then the NPV would be $10,000. Calculation for NPV