Net Present Value Calculations

Published Date: 02 Nov 2017

Introduction:

After graduation there are lot things to be planned for life. Duties which are required to be done to our family begin after joining a job. Taking care of sibling’s education, health care of parents planning and saving money is mandatory. To satisfy the basic and emergency needs savings from monthly salary need to be planned well in advance. Expenditure should be given top priority while planning. Starting from the year of graduation I have planned 20 years into the future. At the end of 20 years after graduation all the assets are liquidated and Net present value is estimated.

List of assumptions:

Average annual income for Industrial Engineer with a Master’s degree in Industrial Engineering in United States of America is $82,000[1]. Income tax for the year 2013 is shown below[2].

Tax rate is considered to be 23%

MARR (Minimum Acceptable Rate of Return) of 15% is considered to determine the Net

Present Value.

Car Loan for $33,500 has been taken for 5 years at rate of 10% per year.

Education loan of $37,000 need to be paid in 5years with interest rate of 12% per year.

House cost $575000 need to be paid in 15 years with interest rate of 6%per year.

Life insurance for coverage of 1million has been taken there is no salvage value since it is only for the benefits of the family members.

Expenditure for child [3]

Age

Expenditure

0 - 4 years

$15,460

5 – 7 years

$15,490

8 – 13 years

$16,390

14 – 17 years

$17,900

Considering the year of graduation as 2014(EOY 0) and 20 years after it is 2034(EOY 20).

Year by Year description of Plans:

2014:

Job hunt begin in starting of spring semester. Finally got an entry level job in reputed company as an Industrial Engineer. Relocating to a new place far away from Arlington. Calculations for this year are not considered.

2015:

My annual income is $63104.75 after tax deduction. I have moved to new apartment and brought a new car due to it my living expenses have increased to $14400. Car which I brought cost around $33,500 and loan is taken for it. An amount $8531.46 need to be paid for the car loan every year for 5 years. Educational loan which I took for my Master’s degree need to be paid in 5years. Amount of $9876.48 need to be paid every year for 5 year to settle my educational loan. Most important thing is to take care of health and in case something goes wrong we need insurance to cover the expenses for health care. Blue shield is well known insurance which cost about $3660 is taken to cover all medical needs.

2016:

Lonely life which I enjoyed is going to end it’s time for my marriage. I am getting married to my girlfriend. Marriage expense cost me about $20,000. Living cost has gone up to $28,800 per year. My brother got admitted to college in Australia. I am sponsoring my brother for his education which cost about $15,000 per year for 4 years.

2017:

It’s time to celebrate my wife has been birth to our little son. Even though my saving has gone down it is year full of joy. The insurance cost is gone high due to inflation and extra member in the family.

2018:

It has been long time last I visited my home town. My parents wanted to bless my little son. This holiday trip costs about $10,000.

2019:

My wife got a job in reputed software company. My education loan and car loan are finally settled. My brother has graduated from the college and he is searching for job in USA.

2020:

Loan which I owed before are settled and my credits scores are high so, I decided move my family into new home which I brought for $575,000. Home loan cost $45905.88 per year for 6% per year for 15 years.

2021:

It’s time to invest in some business. My parents planned to start University in India. Investing an amount of $200,000 in the university enable to own 2% of the total share. Since the property is owned by my parents I will be getting a share of $100,000 per year and will be increasing at rate of 10.5% every year.

2022:

University owned by my family members opened 2 more colleges in nearby cities as new department are been added to the university. My family decides to invest in Logistic business. As part of it I will be investing an amount of $500,000. Estimated a profit of $50,000 will be obtained as share for investing. Profit growth is estimated to be 4.5% every year.

2023:

My son is 5 years old now it time to join school. A private school fee is about $5000/year and increase at rate of 6.25% every year. My brother has started a company which exports sea food to middle-east countries.

2024:

South Africa is the perfect destination for the summer vacation. Vacation expenses costs $40,000. It has been 10 years i started working as industrial engineer Company which I work for has approved my promotion.

2025:

Plans of stepping into Eco friendly energy generation business costs an investment of $1million. Profits from this sector yields about $500,000 per year and profit increases every year at rate of 8.5%. Eco friendly energy generation involves generation of electricity from wind, Molasses (Sugarcane), Hydro.

2026:

To establish a new company to manage all my accounts and shares in various companies required an investment of $5million. New company includes many new departments like Transportation, Civil, Oil and natural gas extraction. My company policy is to buy share in companies which are growing economically and to reduce the risk in investment.

2027:

My company acquires one of biggest chain of holiday hotels and resorts in South India for a deal worth $15million. Deal will yield a profit of $1.75million and profit increases at rate of 12.67% every year.

2028:

Family vacation to Europe and Brazil was an enjoyable trip to spend time with family. Vacation cost about $75,000. My company found shale gas below my ancestor property. Investment of $4.75million was spend for drilling and extraction of shale gas. A profit of $2million/year and it increases at rate of 8% every year.

2029:

Medical college and Hospital is opened to the public in India by my family. I have to invest $20million to obtain 51% of the share. Profit of this sector is about $5million/year and increase by 20% every year.

2030:

My family plans to enter aviation industry but due to heavy investment and debts the plan is put on hold. Measures were taken to recovery from this crisis. Due to the crisis shift hours for workers were reduced.

2031:

Business owned by me and my family faced much worst financial crisis. But, due to the profits from various investments and shares in different companies helped our business to recover from the crisis.

2032:

My company brought 10% share in one of the largest aviation company for $55million. Profit was about $15 million and estimates show an increase of profit every year at rate of 13%.

2033:

Vacation in Bhutan it’s a hidden heaven. Vacation trip costs $20000.

2034:

It’s time to liquidate all my assets. Assets include a car, house, company, and shares in various sectors (Hospital, Medical College, Hotels, aviation, University, oil and gas, Energy). Car is sold for $1500 and depreciation amount is calculated. Salvage value of home is same as the purchase price ($575,000). Thus, Net present value is calculated for all my assets. Salvage Values of all the assets is same as the invested/purchased cost.

Net Present Value Calculations:

Total Cash flow equation: Xj = (Gj- Cj) - (Gj- Cj- Dj)*T - Kj + Lj ± Wj + Vj [4]

Where,

Xj - Total Cash Flows.

Gj - Gross Income for period i.

Dj - Depreciation value for period i.

K - Capital Investment.

L - Salvage Value.

V - Investment Tax Credit.

W - Working Capital.

Net Present Value: NPV=Xj (P/F i,j) [4]

Total cash flow for every year Xj is calculated by the equation

Xj = (Gj- Cj) - (Gj- Cj- Dj)*T - Kj + Lj ± Wj + Vj for every year that is from EOY 0 to 20(j=0 to 20).

Using the Xj calculated, it is substituted in the equation NPVj=Xj (P/F i,j) for j=0 to 20. After calculating NPVj for every year, Total NPV is calculated by the summation of all the NPVj.

NPV=0 + 94350.064 (P / F 15, 1) + 143036.0324 (P / F 15, 2) + 150173.1469 (P / F 15, 3) +162651.9892 (P / F 15, 4) +225633.4817 (P / F 15, 5) + 254963.0011 (P / F 15, 6) + 363671.1947 (P / F 15, 7) + 433396.9493 (P / F 15, 8) + 461219.5663(P / F 15, 9) + 520926.5554 (P / F 15, 10) + 1015447.399 (P / F 15, 11) + 1087932.029 (P / F 15, 12) + 2916454.853 (P / F 15, 13) + 5287013.488 (P / F 15, 14) + 10725294.71 (P / F 15, 15) + 12279527.9 (P / F 15, 16) + 14092429.43 (P / F 15, 17) + 31208846.77 (P / F 15,18) + 35651623.95 (P / F 15, 19) – 61287211.66 (P / F 15,20).

Conclusion:

Net Present Value (Year 2014) = $8008615.522

From the Table and Calculation it has been found that NPV > 0, Future planning seems to be economically good and feasible.

Table 1: Gross income Gj

EOY

My Income

Wife's Income

university

logistics

Energy

Hotel and resorts

0

0

0

0

0

0

0

1

63104.75

0

0

0

0

0

2

66670.16838

0

0

0

0

0

3

70437.03289

0

0

0

0

0

4

74416.72525

0

0

0

0

0

5

78621.27022

67277.7975

0

0

0

0

6

83063.37199

71078.99306

0

0

0

0

7

87756.45251

75094.95617

100000

0

0

0

8

92714.69207

79337.82119

110500

50000

0

0

9

97953.07218

83820.40809

122102.5

52250

0

0

10

103487.4208

88556.26115

134923.2625

54601.25

0

0

11

109334.46

93559.6899

149090.2051

57058.31

500000

0

12

115511.857

98845.81238

164744.6766

59625.93

542500

0

13

122038.2769

104430.6008

182042.8676

62309.1

588612.5

1750000

14

128933.4396

110330.9297

201157.3687

65113.01

638644.6

1971725

15

136218.1789

116564.6273

222278.8925

68043.09

692929.4

2221542.558

16

143914.506

123150.5287

245618.1762

71105.03

751828.3

2503012

17

152045.6756

130108.5336

271408.0847

74304.76

815733.8

2820143.62

18

160636.2563

137459.6657

299905.9336

77648.47

885071.1

3177455.817

19

169712.2048

145226.1368

331396.0566

81142.65

960302.2

3580039.468

20

179300.9443

153431.4136

366192.6425

84794.07

1041928

4033630.469

Table 1: Continued..

EOY

oil and gas

Medical

Aviation

Gross Income Gj

0

0

0

0

0

1

0

0

0

63104.75

2

0

0

0

66670.16838

3

0

0

0

70437.03289

4

0

0

0

74416.72525

5

0

0

0

145899.0677

6

0

0

0

154142.3651

7

0

0

0

262851.4087

8

0

0

0

332552.5133

9

0

0

0

356125.9803

10

0

0

0

381568.1944

11

0

0

0

909042.6612

12

0

0

0

981228.276

13

0

0

0

2809433.342

14

2000000

0

0

5115904.307

15

2160000

5000000

0

10617576.7

16

2332800

6000000

0

12171428.59

17

2519424

7200000

0

13983168.43

18

2720978

8640000

15000000

31099155.19

19

2938656

10368000

16950000

35524474.84

20

3173749

12441600

19153500

40628126.04

Table 2: Expenditure Cj

EOY

Living

Life Insurance

Health Insurance

Education for siblings and kids

Education loan

0

0

0

0

0

0

1

14400

0

3660

0

9876.48

2

28800

0

7344

15000

9876.48

3

44260

6850

9000

15000

9876.48

4

44260

6850

9000

15000

9876.48

5

44260

6850

9000

15000

9876.48

6

44260

6850

9000

0

0

7

44260

6850

9000

0

0

8

44290

6850

9000

0

0

9

44290

6850

9000

5000

0

10

44290

6850

9000

5312.5

0

11

45190

6850

9000

5644.53125

0

12

45190

6850

9000

5997.314453

0

13

45190

6850

9000

6372.146606

0

14

45190

6850

9000

6770.405769

0

15

45190

6850

9000

7193.55613

0

16

45190

6850

9000

7643.153388

0

17

46080

6850

9000

8120.850475

0

18

46080

6850

9000

8628.403629

0

19

46080

6850

9000

9167.678856

0

20

46700

6850

9000

9740.658785

0

Table 2: Continued..

EOY

Holiday Expenses

Car Loan

House Loan

Total Expenses Cj

0

0

0

0

0

1

0

8541.36

0

22078.84

2

20000

8541.36

0

60763.84

3

0

8541.36

0

49270.84

4

10000

8541.36

0

59271.84

5

0

8541.36

0

49272.84

6

0

0

58226.16

74082.16

7

0

0

58226.16

74083.16

8

0

0

58226.16

74084.16

9

0

0

58226.16

79085.16

10

40000

0

58226.16

119398.66

11

0

0

58226.16

79731.69125

12

0

0

58226.16

80085.47445

13

0

0

58226.16

80461.30661

14

75000

0

58226.16

155860.5658

15

0

0

58226.16

81284.71613

16

0

0

58226.16

81735.31339

17

0

0

58226.16

82214.01047

18

0

0

58226.16

82722.56363

19

20000

0

58226.16

103262.8389

20

58226.16

83836.81878

Table 3: Depreciation, Total Cash Flow and NPV

EOY

Investment Kj

Salvage Lj

Gross Income Gj

Total Expense Cj

0

0

0

0

0

1

0

0

63104.75

36477.84

2

0

0

66670.16838

89561.84

3

0

0

70437.03289

93527.84

4

0

0

74416.72525

103527.84

5

0

0

145899.0677

93527.84

6

0

0

154142.3651

118336.16

7

200000

0

262851.4087

118336.16

8

500000

0

332552.5133

118366.16

9

0

0

356125.9803

123366.16

10

0

0

381568.1944

163678.66

11

1000000

0

909042.6612

124910.6913

12

5000000

0

981228.276

125263.4745

13

15000000

0

2809433.342

125638.3066

14

4750000

0

5115904.307

201036.5658

15

20000000

0

10617576.7

126459.7161

16

0

0

12171428.59

126909.3134

17

0

0

13983168.43

128277.0105

18

55000000

0

31099155.19

128784.5636

19

0

0

35524474.84

149323.8389

20

0

102026500

40628126.04

130516.8188

Table 3: Continued..

EOY

Depr Dj

Total cash Flow

(P/F i,n)

NPV

0

0

0

1

0

1

1600

94350.064

0.8696

82046.81565

2

1600

143036.0324

0.7562

108163.8477

3

1600

150173.1469

0.6575

98738.84408

4

1600

162651.9892

0.5718

93004.40745

5

1600

225633.4817

0.4972

112184.9671

6

1600

254963.0011

0.4323

110220.5054

7

1600

363671.1947

0.3759

136704.0021

8

1600

433396.9493

0.3269

141677.4627

9

1600

461219.5663

0.2843

131124.7227

10

1600

520926.5554

0.2472

128773.0445

11

1600

1015447.399

0.215

218321.1907

12

1600

1087932.029

0.1869

203334.4963

13

1600

2916454.853

0.1625

473923.9136

14

1600

5287013.488

0.1413

747055.0058

15

1600

10725294.71

0.1229

1318138.719

16

1600

12279527.9

0.1069

1312681.533

17

1600

14092429.43

0.0929

1309186.694

18

1600

31208846.77

0.0808

2521674.819

19

1600

35651623.95

0.0703

2506309.164

20

1600

-61287211.66

0.0611

-3744648.633

∑NPV=

8008615.522