Net present Cost

donnacardwell

can anyone help with the meanings of net present value and net present cost?

Thanks :001_smile:

SandyHood

Net Present Cost
The total cost of a project (after you have taken account of the time value of money)
For example
http://www.aat.org.uk/other_files/exam-answers-07/intermediate_and_advanced/ECR-questions.pdf
page 16
Machine A
If costs £800,000 now so that is the present cost of the machine
but it will also cost £365,000 in year 1, £380,000 in year 2 and £405,000 in year 3 to operate.
As the cash will not be paid for these costs until the end of yr1, yr 2 and yr 3 the amounts we will pay are not the value today.
We discouint the amounts using the time between now and the date we will have to pay, and a predetermined discount rate (or interest rate). In this question 14%
So the present value of these payments are:-

1. Now year 0 £800,000
2. end of yr 1 £320,174 (the discounted £365,000)
3. end of yr 2 £292,399
4. end yr 3 £2373,363
5. This all adds up to a net present cost for machine A of £1,685,936

SandyHood

Net Present Value
If you look on page 20 of
http://www.aat.org.uk/other_files/ECRJune06questions.pdf

The example shows a new business idea which has costs and revenues each year. The discounting of future cash flows is similar
............................................Year 0..Year1..Year2....Year3


............................................. £000.. £000 .. £000 ....£000
Capital expenditure ................... 600
Other cash flows:..........................................................
Sales income ...................................... 760..... 920..... 1,060
Operating costs .................................. 456...... 542....... 612


So we have annual cash flows of . (600).. 304....... 378....... 448

To find how much these cashflows are worth now we have to discount them (as we did in the NPC example)
Present values ......................... (600)... 267....... 291....... 302

And if you add up all these present values the total is the Net Present Value: £260,000 (or unrounded £259,912)

donnacardwell

Thanks very much :001_smile: