Net future worth

In Figure 6.8 the net cash flow is shown at its value in the year in which it occurred. So the figures on the ordinate show the future worth of the project the cumulative net future worth (NFW). 

Net future worth NFW , Simple. When plotted as cash-flow diagram, shows timing of investment and income Takes no account of the time value of money... 

Discounted cash-flow analysis, used to calculate the present worth of future earnings (Section 6.10.3), is sensitive to the interest rate assumed. By calculating the NPW for various interest rates, it is possible to find an interest rate at which the cumulative net present worth at the end of the project is zero. This particular rate is called the discounted cash-flow rate of return (DCFRR) and is a measure of the maximum rate that the project could pay and still break even by the end of the project life. 

Inflation depreciates money in a manner similar to, but different from, the idea of discounting to allow for the time value of money. The effect of inflation on the net cash flow in future years can be allowed for in a similar manner to the net present worth calculation given by equation 6.9, using an inflation rate in place of, or added to, the discount rate r. However, the difficulty is to decide what the inflation rate is likely to be in future years. Also, inflation may well affect the sales price, operating costs and raw material prices differently. One approach is to argue that a decision between alternative projects made without formally considering the effect of inflation on future earnings will still be correct, as inflation is likely to affect the predictions made for both projects in a similar way. 

It is quite possible to compare a series of alternative investments by each of the profitability measures outlined in the early part of this chapter and find that different alternatives would be recommended depending on the evaluation technique used. If there is any question as to which method should be used for a final determination, net present worth should be chosen, as this will be the most likely to maximize the future worth of the company. 

The same methods that were explained and applied earlier in this chapter are applicable for replacement analyses. Net-present-worth and discounted-cash-flow methods give the soundest results for maximizing the overall future worth of a concern. However, for the purpose of explaining the basic principles of replacement economic analyses, the simple rate-of-retum-on-investment method of analysis is just as effective as those methods involving the time value of money. Thus, to permit the use of direct illustrations which will not detract from... 

The net present value is always less than the total future worth of the project because of the discounting of future cash flows. Net present value is easily calculated using spreadsheets, and most spreadsheet programs have an NPV function. 

Is this a good investment Let us introduce the basic concept that money on hand is worth more than future money, or the time value of money. The net present value NPV is defined to be... 

The first step in your analysis is to determine your net worth. This is a summary of your spending and saving habits. It shows the cumulative effect of your financial decisions. It not only shows how you re doing, but also gives clues to potential changes to improve your financial future. 

Cost-effectiveness and cost-benefit analyses are frequently mentioned in academic and policy-analysis circles. These notions center on careful examination of the costs and their corresponding outputs. Eisenberg defines cost-effectiveness analysis as the measure of the net cost of providing service (expenditures minus savings) as well as the results obtained (e.g., clinical results measured singly or a series of results measured on some scale). Cost-benefit analysis determines whether the cost is worth the benefits by measuring both in the same units. Such analyses will be critical, as future policy decisions are made with regard to the collection, allocation, and utilization of finite resources in the health care system for the enhancement of health status of the American people. 

How does the cost of capital affect decisions to invest in R D projects To assess whether the investment is worth its 10 million R D cost, company managers (on behalf of their investors) would compute the net present value (NPV) of the investment by converting all future expected cash flows (both into and out of the firm) into their present value at the time the investment decision is made using the cost of capital appropriate to the project as the discount rate." The algebraic sum of the present values of all the expected cash flows is the NPV of the investment. If the NPV is greater than zero, the investment is worth it and will compensate investors at a rate of return that exceeds the cost of capital. 

The tangible costs and benefits are then used to determine the viability of the project. Typictdly, this involves determining the net present value (NPV) of the system. Since the cost of developing the system is incurred before the systems begins to generate value for the organization over the life of the system, it is necessary to discount the future revenue streams to determine whether the project is worth undertaking. The present value of anticipated costs at a future point in time is determined by ... 

The cash flow analysis in the example above neglects one very important point. It is important to recognize that 1 today is worth more than 1 tomorrow. With the 1 received today there is the potential of investing it so that it earns money. This concept is called present value, which is defined by the APICS Dictionary as the value today of future cash flows. The net present value considers the value today of future earnings (operating expenses have been deducted from net operating revenues) for a given number of time periods. ... 

Looking ahead, an individual may want to and be able to roughly estimate annual income, in future dollars, from Social Security. This projected income, if it materializes, significantly reduces the net worth needed at the beginning of an individual s returning phase. Given the uncertainty of the Social Security system at the time this book was written. Social Security is assumed to be zero in Scenario 1 and a nominal value of 50,000, in future dollars, is assumed in Scenario 2. 

One of the key measures of corporate performance today is shareholder value. In other words, what is the company worth to its owners Increasingly senior management within the business is being driven by the goal of enhancing shareholder value. There are a number of complex issues involved in actually calculating shareholder value but at its simplest it is determined by the net present value of future cash flows. These cash flows may themselves be defined as ... 

It will be apparent that it is possible for a company to generate a negative EVA. In other words, the cost of capital employed is greater than the profit after tax, The impact of a negative EVA, particularly if sustained over a period of time, is to erode shareholder value. Equally improvements in EVA will lead to an enhancement of shareholder value. If the net present value of expected future EVAs were to be calculated this would generate a measure of wealth known as market value added (MVA), which is a true measure of what the business is worth to its shareholders, A simple definition of MVA is ... 

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