The Significance of a positive Net Present Value

Assume that you have analyzed a $100 million project, using a cost of capital of 15%, and come up with a net present value of $ 1 million. The manager who has to decide on the project argues that this is too small of a NPV for a project of this size, and that this indicates a "poor" project. Is this true?

a. Yes. The NPV is only 1% of the initial investment b. No. A positive NPV indicates a good project Explain your answer.

Illustration 5.11: NPV From The Firm's Standpoint - Bookscape On-line

Table 5.13 calculates the present value of the cash flows to Bookscape, as a firm, from the proposed on-line book ordering service, using the cost of capital of 22.76% as the discount rate on the cash flows. (The cash flows are estimated in illustration 5.4 and the cost of capital is estimated in illustration 5.2)

Table 5.13: FCFF on Bookscape On-line

Year

Annual Cashflow

PV of Cashflow

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