NPV Calculation confusion, investment, discounted, clearing, expected

islandgyrl

Hi,
Need help in clearing a confusion. Here is the scenario
The plant would cost ￡1,000,000 to implement, it would last 5 years.Half the plant would be paid for in cash on 1 April 20X0, and the remaining half (also in cash) on January 20X1.
Future Cash flows expected are 240, 330, 370, 540, 260, 290.
Confusion is on initial investment part - Since 50% of payment is made during Year 1, should this be discounted ? 500K - Year 0 (Un discounted) 500K (year 1 outflow - discounted). Is this correct?
please help
Thanks

pimpineasy

The initial outflow should be discounted for zero years, and the second for ? year.  Cash flows are cash flows; it doesn’t matter whether they’re inflows or outflows: discount them from the date they occur to the present.

joehogue

You can pick any date you like at “time 0”: 1 Apr 20X0, 1 Jan 20X0, 5 Aug 20X3, … anything.  It will change the NPV, but it won’t affect the project decision; i.e., if the NPV is positive with one date as time 0, the NPV will be positive with any other date taken as time 0.  Similarly if the NPV is negative.
If the first cash flow is 1 Apr 20X0, that would the the typical date to choose as time 0; you wouldn’t normally discount to 1 Jan 20X0.

MiniMe7

the only dates available are
1 April 20x0 - 500K part of investment
1 jan 20x1 - 500K remainig part of investment.
Taking t0 as 1 April 20x0 and bringing all the CFs to this point would result into correct NPV value.  Assuming all other cash flows from project occure at end of the year..
I am not concerned about the overall project decision but need to find out the correct NPV value..

ap0258

Project A. Size- 2500 , NPV-300
Project B  Size- 7500 , NPV- 700
Which u will choose?