NPV of Micron Technology:
1) Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)t + CF2 / (1+r)t + CF3 / (1+r)t + CF4 /(1+r)t + CF5/ (1+r)t
Where: t = Periodic cash flow payments (years)
CF = Cash Flow Amount
r = Discount rate = 5%
PV of CF = 350,000/(1+.05)1+939,000/(1+.05)2+1,122,000/(1+.05)3+500,000/(1+.05)4+
900,000/(1+.05)5
=333,333.33+ 851,700.68 + 969,225.79 + 411,353.35 + 705,163.36
PV of CF = 3,270,776.51
2) Calculate NPV
NPV = -3,219,000 + 3,270,776.51
NPV = $51,776.51
This project should be accepted. The positive net present value signifies that future cash flow amounts are sufficient to cover the initial cash outflow. This project will add $51,776.51 to Micron Technology's value.
Capital budgeting is the planning process used by financial managers for making major capital investment decisions. Project evaluation involves identifying the potential projects relevant cash flows; the incremental changes to a firms overall cash flow (increase or decrease) that are of a direct result of the decision to accept the project. By estimating the incremental cash flow associated with each potential project, financial managers are able to determine whether long term investments such as new equipment or machinery, new products, and new research and development projects, are a viable option worth pursuing.
Primarily, the stated objective of a publicly traded companies financial management team is the maximization of the wealth of its shareholders. Shareholder wealth increases through the receipt of dividends and through the increase in the share price over time. Fluctuations in the share price can help shareholders gauge the success of a recent financial management decision. Therefore a firm's objective of maximizing shareholder wealth is interchangeable with the objective of maximizing the...