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Accounting Help

Npv

     
9:35 pm on Jul 14, 2003 (gmt 0)

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I know this is not web related, but does anyone know how to figure out the Net Present Value
given the Cost of Capital and discount rate?

Thanks

9:39 pm on July 14, 2003 (gmt 0)

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Search for "how to compute net present value" on Google. The first result is from CCH, and contains tables that will guide you.
10:52 pm on July 14, 2003 (gmt 0)

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How's the degree going? College is out for a friend of mine getting her master's in Economics, but I guess you're in summer school?

Hope they go well. Seems that equation is pretty famous (I don't have any business books from my college days left, I'm afraid) but it should be easy enough to find.

Is there a particular aspect of NPV calculations that are stumping you, or perhaps some trouble with where to plug in which value?

10:57 pm on July 14, 2003 (gmt 0)

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Re-reading my post makes it sound short. It wasn't intended that way. :)

I just mentioned CCH and their tools because I use them frequently, and they're very good at providing explainations and easy to use tools. I told you to do the Google search because I'm not sure (yet) where you can and can't post URLs on WW, so I err on the cautious side. :)

HTH.

12:47 pm on July 15, 2003 (gmt 0)

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It sucks... I am in a e-commerece grad program and the teacher is an accouting/finance professor. He thinks everyone knows and wants to know this stuff.

The problem is there isn't a text book that goes along with the class. Well technically there is, but the text book is for cases.

Thanks for the help, will let you know what I find out.

1:11 pm on July 15, 2003 (gmt 0)

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I can do this in 5 words.

Excel, Insert Function, Financial, NPV.

1:33 pm on July 15, 2003 (gmt 0)

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Thanks Pearl,

I tried that, but not sure it worked right.
Here is what I have:
cash flow for 0-3 (-2,-1, 8,4 million)
cost of capital (15%)
discount rate (25%)

How do I use the function for that?

1:37 pm on July 15, 2003 (gmt 0)

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I am in a e-commerece grad program and the teacher is an accouting/finance professor. He thinks everyone knows and wants to know this stuff.

Everyone should want to know it!

If you're planning on making any money or managing any budgets in your ecommerce career then working out things like NPV will be very useful indeed. Just because you're focusing on ecommerce doesn't mean that you shouldn't know how a business works - it means that you should take care to learn this even more!

1:44 pm on July 15, 2003 (gmt 0)

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I understand the basics of NPV, but can't find a forumla that I understand to determine this problem.
1:48 pm on July 15, 2003 (gmt 0)

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Hope this helps:

http:**//www.google.com/search?hl=en&lr=&ie=UTF-8&oe=UTF-8&q=%22npv+formula%22

Try the third one down or one of the adwords.

2:05 pm on July 15, 2003 (gmt 0)

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Thanks but none of that is helping. None of that takes into account finding the NPV knowing the cost of capital and the discount rate.
2:18 pm on July 15, 2003 (gmt 0)

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Is it possible that it is some kind of a trick question? IMO, the discount rate is based on the cost of capital and comprises some other factors like inflation. If this is the case, then you can simply ignore the capital cost.

If the discount rate does not comprise the cost of capital, you need a "nominal" discount rate. This should be (1 + 0.15)(1 + 0.25) - 1.

Anyway, it's a long time since I've been at uni and, so, I probably don't know what I'm talking about. :)

2:21 pm on July 15, 2003 (gmt 0)

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Thanks

I used the Excel function and came up with
$3,494,400.00

Looks good enough for me. Spent too long on this one. Have many more to get to.

Thanks for all your help. I am sure I will be back

2:21 pm on July 15, 2003 (gmt 0)

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I think what is stumping you is that your prof has given you discount rate and cost of capital. One of them is irrelevant. The terms 'discount rate', 'hurdle rate', 'opportunity cost of capital' are all equivalent, so your discount rate is equal to your cost of capital. 'Your' in bold, because the rate depends on how risky the investment/project is; there is no such thing as the rate.

So you need to choose which of the given rates to use. Figure out which is based on the closest equivalent investment. e.g. Say the discount rate given is for property investments and the cost of capital given is an IT company's internal weighted average cost of capital. Then choose the discount rate if the project you are trying to calulate the value of is a building project, but choose the cost of capital if it is an IT project. Does that make sense?

The formula is really simple; you don't need Excel, and you should figure out how to do it the long way. I think I will show an explicit formula here, because even after bakedjake's post (msg #2) you still seem to be having trouble...

For 4 time periods:

C0 + C1/(1+r) + C2/(1+r)^2 + C3/(1+r)^3

Shawn

[added... Damn, I'm too late on the submit button. Markus got there first

It will depend on which discount rate you ended up using, but my guess is something closer to $8M, not $3M
]

2:34 pm on July 15, 2003 (gmt 0)

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So it would be something like:

-2 + -1/(1+.25) + 8/(1+.25)+ 4/(1+.25)=6.8?

numbers are simplified.

2:52 pm on July 15, 2003 (gmt 0)

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No, more like:

-2 + -1/(1+.25) + 8/[(1+.25)*(1+.25)]+ 4/[(1+.25)*(1+.25)*(1+.25)]
= -2 + -1/1.25 + 8/1.56 + 4/1.95

(assuming 25% is the correct rate to use)

3:17 pm on July 15, 2003 (gmt 0)

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AHHH I see the light, or so I think.
I believe 25% is correct since it is the discount rate.