How to calculate the Net Present Value
Let us take the following example:
The Saint James Abby hotel in Paris is upgrading its facilities; and needs to decide
between building an in-house spa or adding an additional wing with luxury rooms. The
hotel has appointed you as financial advisor and provided the following information
regarding the two projects. The discount rate for both projects is 10%.
Spa Luxury wing
Initial
investment R100 000 R180 000
Year Time Net cash flow Net cash flow
1 T=1 R20 000 R90 000
2 T=2 R30 000 R150 000
3 T=3 R50 000 R60 000
4 T=4 R10 000 R30 000
Question 1:
The net present value (NPV) for the spa would be ____________ and_________________
for the luxury wing.
Question 2:
Based on your calculation, with which project should the hotel proceed?
Step 1:
Decide whether or not you must calculate the present or the future value of the investment.
In this scenario the question clearly states you need to calculate the NET PRESENT VALUE.
Step 2:
Draw up a table to help you with your calculations:
Spa Luxury wing
Year Cash flow PVIF PV Cash PVIF PV
flow
NPV
Your table should include columns for each of the projects.
Each project should have a column that contains the:
1) cash flow
2) the Present Value Interest Factor (PVIF) and
3) The Present Value (PV)
Let us take the following example:
The Saint James Abby hotel in Paris is upgrading its facilities; and needs to decide
between building an in-house spa or adding an additional wing with luxury rooms. The
hotel has appointed you as financial advisor and provided the following information
regarding the two projects. The discount rate for both projects is 10%.
Spa Luxury wing
Initial
investment R100 000 R180 000
Year Time Net cash flow Net cash flow
1 T=1 R20 000 R90 000
2 T=2 R30 000 R150 000
3 T=3 R50 000 R60 000
4 T=4 R10 000 R30 000
Question 1:
The net present value (NPV) for the spa would be ____________ and_________________
for the luxury wing.
Question 2:
Based on your calculation, with which project should the hotel proceed?
Step 1:
Decide whether or not you must calculate the present or the future value of the investment.
In this scenario the question clearly states you need to calculate the NET PRESENT VALUE.
Step 2:
Draw up a table to help you with your calculations:
Spa Luxury wing
Year Cash flow PVIF PV Cash PVIF PV
flow
NPV
Your table should include columns for each of the projects.
Each project should have a column that contains the:
1) cash flow
2) the Present Value Interest Factor (PVIF) and
3) The Present Value (PV)
