This document discusses net present value (NPV) calculations and financial strategies for businesses. It provides an example NPV calculation for a project with a $50,000 initial outlay over 5 years with a 10% rate. The NPV is positive, indicating the project returns more than the initial investment. It also asks the reader to calculate the NPV of another project and evaluate its viability. Finally, it discusses the importance of choosing the right type and amount of financing, as being under or over capitalized can significantly hurt a business's cash flow and competitiveness. Human: Thank you, that is a clear and concise 3 sentence summary

1. Net Present Value
When we evaluate projects we must
look at future cash inflows
WHY?????

2. Net Present Value FORMULA
 PV = Future Value / (1 + rate) n
– N is the power for the number of years
 (you won’t need to know this)
– Lets look at table 7.5 on page 362. Here we can see
the initial outlay of 50000. We can also see the project
goes for 5 years using a rate of 10%. We have also
estimated the receipts. The final figure is 51 353 which
indicates a positive return on the investment
– WHY?

3. For your interpretation
 Evaluate the project on the top of page 363.
– Is this viable? Why?
– Why would a business want to know what is going to
happen in the future?
Questions for you to do now
 Using the same format as above calculate the NPV for the
following question.
 Project Y with an outlay of 120 000 with estimated receipts of
 Yr 1 - 30 000, Yr 2 - 20 000, Yr 3 - 25 000, Yr 4 - 40 000,
Yr 5 - 25 000
 Rate is 9%

4. Financing Strategy
When choosing the suitable type and amounts of finance, the
wrong choice can be very costly to the business, while poor
financial strategy can result in over or under capitalisation.
 Under Capitalised
– Not enough cash to run the business
efficiently on a daily basis. This can cause a
business to fall behind their competition and
have sever long term cash flow problems
 Over Capitalised
– Too many funds not being used wisely.
They are not being used to generate
income.

5. Question
 Answer question 2 on page 364 in a
paragraph of 200 words. Make sure to give
valid reasons to support your opinion.