Strategic Financial Management

FIRMEX Corporation (PLC

NPV Analysis

The Net Present Value approach to investment appraisal is an example of a discounted cash flow application . The procedure involves discounting all cash flows identifiable with the project at an appropriate cost of capital and arriving at the net flow of cash to or from the firm . Final Positive cash flows imply that the project is financially viable , while final negative cash flows speak otherwise (BPP , 2007

For FIRMEX Corporation (PLC , the NPV 's for both the projects are as follows Project A

Year

Cash Flows ) PV Factor 10 Cash Flow (Discounted

0 (200 ) 1 (200

1 200 0 .909 181 .8

2 800 0 .826 660 .8

3 (800 ) 0 .751 (600 .8

Net Present Value 42 .6 Project B

Year Cash Flows ) PV Factor 10 Cash Flow (Discounted

0 (150 ) 1 (150

1 50 0 .909 45 .5

2 100 0 .826 82 .6

3 150 0 .751 112 .7

Net Present Value 90 .8 As can be inferred , if the company is not financially constrained and both the projects are not mutually exclusive , FIRMEX may accept and undertake both of them . However , if , for reasons other then financial constraints , the projects are mutually exclusive , Project B would be a better choice as it has a higher NPV and less variability of cash flows pointing to less risk

Suppose the company is financially constrained , the best yardstick to judge which project to undertake would be to rank the projects using a profitability index...