Prepare for your exams
Get points
Guidelines and tips

Prepare for your exams

Study with the several resources on Docsity

Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips

Sell on Docsity

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search Store documents

The best documents sold by students who completed their studies

Search through all study resources

Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents

20 Points

For each uploaded document

Answer questions

5 Points

For each given answer (max 1 per day)

All the ways to get free points

Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

University Rankings

Discover the best universities in your country according to Docsity users

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

From our blog

Exams and Study

Go to the blog

Evaluating NPV and DCF: RAD Corp's R&D and Kageyama Ltd's New Factory, Assignments of Economics

Trinity College Economics

The Net Present Value (NPV) method for evaluating investments and applying the NPV rule. It provides examples of calculating NPV for RAD Corporation's R&D program and Kageyama Ltd's new factory, considering their respective opportunity costs of capital.

What you will learn

How is the NPV rule applied to choose between alternative investments?
What is the Net Present Value (NPV) method and how is it used to evaluate investments?

Typology: Assignments

2019/2020

Uploaded on 04/19/2020

lukeod 🇮🇪

1 document

1 / 10

This page cannot be seen from the preview

Don't miss anything!

•Net Present Value (NPV)

•Describes a way to characterise the value of an investment and a

method for choosing among alternative investments.

•In calculating the NPV of an investment we use an estimate of the

opportunity cost of capital as the discount rate

•A company undertaking a positive NPV investment increases

shareholders wealth

Discounted Cash Flow Applications

Partial preview of the text

Download Evaluating NPV and DCF: RAD Corp's R&D and Kageyama Ltd's New Factory and more Assignments Economics in PDF only on Docsity!

Net Present Value (NPV)
Describes a way to characterise the value of an investment and a method for choosing among alternative investments.
In calculating the NPV of an investment we use an estimate of the opportunity cost of capital as the discount rate
A company undertaking a positive NPV investment increases shareholders wealth

Discounted Cash Flow Applications

The steps in computing NPV and applying the NPV rule are as follows
Identify all cash flows associated with the investment – all inflows and outflows
Determine the appropriate discount rate or opportunity cost r for the investment project.
Sum all the present values. The sum of the present values of all cash flows
Apply the NPV rule: If the investment NPV is positive and investor should undertake it; if the NPV is negative, the investor should not undertake it. If an investor has two candidates but only can invest in one the investor should choose the candidate with the higher positive NPV.

As an analyst covering the RAD Corporation, you are evaluating its research and development (R&D) program for the current year. Management has announced that it intends to invest €1 million in R&D. Incremental net cash flows are forecasted to be €150,000 per year in perpetuity. RAD Corporation’s opportunity cost of capital is 10%.
State whether RAD’s R&D program will benefit shareholders, as judged by the NPV rule.
Evaluate whether your answer to part 1 changes if RAD Corporations’ opportunity cost of capital is 15% rather than 10%.

Example Evaluating a Research and

Development Program Using the NPV

rule

Solutions
The constant net cash flows of €150,000, which we can denote as from perpetuity. The present value of the perpetuity is so we calculate the projects NPV as

With an opportunity cost of capital of 15% you compute the NPV as you did above, this time you use 15% discount rate.

With a higher opportunity cost of capital, the present value of inflows is smaller and the program’s NPV is smaller: At 15% the NPV exactly equals €0. At NPV =0 the program generates enough cash flow to compensate shareholders for the opportunity cost of making the investment. When a company undertakes a zero-NPV project, the company becomes larger but shareholders wealth does not increase

Determine whether the project will benefit Kageyama’s shareholders using the NPV rule.
Because the projects NPV are positive ¥89.55 million, it should benefit Kageyama’s shareholders.