Process of evaluating the project

Process of evaluating the project
Financial evaluation is essential in determining its viability as well in assisting the firm to achieve its primary goal. Evaluation of a project involves the cost of financing the project with the projected or expected cash flows from the project. The value of money over the project life is an important consideration in evaluating this project. NPV has been considered to be the essential formula for evaluating a project. It takes into account the change in the value of money in respect to a change in time as well as the change in investor wealth over the project life. The inputs to NPV comprise of the rate of return and project cash flows. The project has uneven cash flows.
Calculation of NPV
Year cash flow
-25,000
10,000
10,000
10,000
10,000
10,000
15,000
15,000
Salvage value=50000
Rate of return =14%
Computation of PV and NPV
The cash flows are uneven and therefore:
YEAR 1 2 3 4 5 6 7
Net cash flow 10000 10000 10000 10000 10000 15000 15000
Salvage value 50000
Total cash inflow 10000 10000 10000 10000 10000 15000 65000
X PVIF 0.877 0.769 0.675 0.592 0.519 0.4565 0.400
PV of cash inflows 8770 7690 6750 5920 5190 6847.5 26000
Total PV 67,167.5 Less: initial investment 25,000 NPV 42,167.5 If the new investment project is undertaken at the initial cost of $25,000, then the shareholders will earn 14% in returns on investment. It is also dependent on whether the cash flows from the project are realized as estimated. With the investment of 25,000 the company has returned with a present value of 42,167.

5. The $25,000 is the maximum amount you should pay for the project. The primary goal of the firm is to earn the annual cash flows which could be reinvested elsewhere.
PV of terminal value
Terminal value =50,000
PV =Fv (1+r)-n
PV =50000(1+0.14)-7
PV =50000(0.399963732)
=19,981.866