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NPV Calculation

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  • #51955

    newbie
    Participant

    I am discussing the business case on a projected project with the local money belt and want to use NPV to quantify how much value “realizing the goal statement” is projected to add to the company.  
    Any thoughts as to the amount of time to use when determining this metric? Discount rate?  Is there a LSS standard here or is it to be determined by FIN/leadership?  There is no local guidance on this point….
    Thanks!

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    #181999

    anon
    Participant

    12 months from completion of the project.

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    #182002

    Darth
    Participant

    Using the “what have you done for me lately” approach, the payback for 1 year is about all the credit you get.

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    #182008

    anon
    Participant

    1 year? I thought I had heard that previously but when I checked it was 12 months.

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    #182009

    Darth
    Participant

    No that is not correct. If you add the ever present 1.5 months you get 13.5 months equals a year.

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    #182012

    Steve Clapp
    Member

    The discount rate is also known as the firm’s weighted average cost of capital (WACC).  This factor is the firm’s mix of its cost of debt and its expected return on its equity.  The riskier the project, the higher the WACC required to compensate investors for the risk.  You should ask your CFO for help in determining a range of WACCs based on your organization’s current debt/equity mix: low-risk, medium-risk, and high-risk.  Just as important, you and your CFO should update these data periodically to adjust for your organization’s mix of debt and equity.  Once you have this WACC calculation process in place, you reduce the risk of having to defend how you arrived at your net present value (the discount factor, at least; you’ll still have to argue your projected benefits!).
     
    The preceding definition is just an overview.  Google “weighted average cost of capital” for more detailed explanations (Wikipedia’s entry depicts a nice equation to calculate WACC).

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    #182018

    anon
    Participant

    How much was it you spent on that PhD? Where I come from a phd was a tool, a post hole digger.

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    #182022

    anon
    Participant

    You paid how much for that PhD?

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    #182030

    Darth
    Participant

    It was a bargain at $250,000. Made it back real fast. “Cost” included a fews years of lost income plus the direct cost.

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    #182040

    newbie
    Participant

    Thanks guys!

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