City-Data Forum Net Present Value / Intrinsic Value (buying, company, cost, 100,000)
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01-14-2018, 11:29 AM
 111 posts, read 148,082 times Reputation: 59

Hello,
Is anyone familiar with the calculation?
I have seen several ways of calculating net present value (NPV). The gas station example has the cash flows at 100,000 (ten years) and discount rate is 10%. So the net present value for ten years is \$614,456 (Call this "Total").
Parameters: Gas station bought at \$500,000. Gas station sold ten years later at \$250,000.
My question is I see several versions of these calculations,
Once they have the Total(NPV) = 614,456. They subtract using the initial investment cost of business and another method is adding the discount factor (10th year) of the estimated sale of business
One example,
Total - Initial investment = 614, 456 - 500,000 = 114,456
Another example (Pabrai's method in Mosaic),
Total + Sale Price = 614,456 - (250,000* (1+.10)^10) = 710,842.

Sorry if this is confusing

01-14-2018, 12:09 PM
 Location: Paranoid State 12,729 posts, read 9,479,380 times Reputation: 15025
Quote:
 Originally Posted by joeng99 Hello, Is anyone familiar with the calculation?
Yes.

01-18-2018, 07:49 AM
 Location: Los Angeles 2,452 posts, read 1,340,019 times Reputation: 2753
You appear to be coming up with two different results but I think you are not comparing apples to apples.

Looks like you the following:
1) initial investment (a negative cash outflow) of buying the gas station (-\$500,000);
2) you have ten years of positive cash flows from the gas station at \$100,000 per year;
3) you have the "reversion" or sale of the gas station at the end of the holding period for \$250,000 (positive cash flow);

In your first calculation I don't see that you accounted for the sale of the gas station at the end of the holding period (Number 3 above).

In your second calculation it looks like you have not accounted for the initial investment of buying the gas station (Number 1 above: negative \$500,000).

If the NPV is > 0 then the investment creates value to the company and/or investor.

If the net present value is greater than zero the proposed investment will increase a company's earnings; or in the case of an investor, increase a shareholder's wealth.
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