NPV of Disney Theme Park =


Note that the net present value of 86,302 million Bt is exactly equal to the dollar net present value computed in illustration 5.12, converted at the current exchange rate of 42.09 Bt per dollar.

NPV in dollars = NPV in Bt/ Current exchange rate = 86,302/42.09 = $2,050 million

Terminal Value, Salvage Value and Net Present Value

When estimating cashflows for an individual project, practicality constrains us to estimate cashflows for a finite period - 3,5 or 10 years, for instance. At the end of that finite period, we can make one of three assumptions.

• The most conservative one is that the project ceases to exist and that its assets are worthless. In that case, the final year of operation will reflect only the operating cashflows from that year.

• We can assume that the project will end at the end of the analysis period and that the assets will be sold for salvage. While we can try to estimate salvage value directly, a common assumption that is made is that salvage value is equal to the book value of the assets. For fixed assets, this will be the undepreciated portion of the initial investment whereas for working capital, it will be the aggregate value of the investments made in working capital over the course of the project life.

• We can also assume that the project will not end at the end of the analysis period and try to estimate the value of the project on an ongoing basis - this is the terminal value. In the Disney theme park analysis, for instance, we assumed that the cashflows will continue forever and grow at the inflation rate each year. If that seems too optimistic, we can assume that the cashflows will continue wth no growth or even that they will drop by a constant rate each year.

The right approach to use will depend upon the project being analyzed. For projects that are not expected to last for long periods, we can use either of the first two approaches; a zero salvage value should be used if the project assets are likely to become obsolete by the end of the project life (example: computer hardware) and salvage can be set to book value if the assets are likely to retain significant value (example: buildings).

For projects with long lives, the terminal value approach is likely to yield more reasonable results but with one caveat. The investment and maintenance assumptions made in the analysis should reflect its long life. In particular, capital maintenance expenditures will be much higher for projects with terminal value since the assets have to retain their earning power. In the Disney theme park, the capital maintenance expenditures climb over time and become larger than depreciation as we approach the terminal year.

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