Finance question – capital budgeting and dividend policies
The net present value (NPV), which is an indicator of investment profitability, is determined by subtracting the cash flow futures from the initial cost. The NPV for each project would be determined at the point it was to be invested.
In order to calculate the NPV, both projects must be considered. We need to take into account all cash flows including capital costs as well as operating expenses and any taxes. To make an investment decision, the investor must have the rate of return required to calculate the discount rate.
For Project 1: A discounted cash flow analysis can be used to calculate NPV as follows: Adding up all expected future cash inflows – subtracting out all expected future costs – then dividing by (1 + R), where R is our assumed discount rate for this project. The gross present value will be calculated before any taxes or other costs are added. After taking into consideration applicable taxes & other associated costs – net present value can then be derived accurately for Project 1 at time of investment.
For Project 2: A discounted payback period analysis can also be used to calculate NPV as follows: Calculating cumulative net revenue over time; deducting out cumulative expenses from revenue; then dividing by (1+R); where R represents our desired rate of return on this project taking into consideration applicable taxes & other associated costs – net present value can then be derived accurately for Project 2 at time of investment.
In conclusion, accurate net present value calculations are important in assessing which investments are most likely to yield returns that meet investors’ expectations and risk profiles over given periods. While many factors can influence whether an investment decision is made, such as corporate tax rates or liquidity requirements, it’s important to understand how they impact NPV calculations when deciding whether a project should be pursued.