Question

To prepare for this Discussion, assume that you have just estimated the cash flows and NPV for a project your company is considering. Your estimated NPV was +$10. The CFO is not sure whether to accept or reject the project.

Post an analysis of the feasibility of the project the CFO is considering based on estimated cash flows and NPV. In your analysis, answer the following:

What type of analysis would you use to make a business case for or against the project?

How would you justify your decision?

Answer 1

In a project evaluation, the most important part is to estimate whether the discounted value of the project cash flows is more than the initial investment. In other words, if the project’s Net Present Value is positive i.e. the discounted value of project cash flows discounted at the project’s cost of capital is more than the initial investment, then the project adds value to the firm. On the other hand if the Net Present Value is negative, then the project does not adds value.

So in this case since after analysis, it is found that the NPV is positive, then this project should be undertaken as it is economically viable. It being a NPV positive project, the project will add to the firm value and hence the project should be undertaken.