Capital budgeting computation

CFA Level II Corporate Finance
#1

Hi everyone,

A question specifies that there would be cost savings of 7,000 for year 1 to 6 and cash outflow at year 6 of 9000 (due to Net working capital increase). Interest rate is 12%. It asked for the NPV.

Using the calculator

N = 6

FV = -9000

PMT = +7000

I = 12

PV = -24,220.17

I cannot understand how the PV can be a negative amount? Working it out manually in excel says that it should actually be a positive 24,220.17 (cash inflow).

Could someone help me out please?

Thanks.

#2

You need to understand how the TVM buttons work.

What you’re telling your calculator is that you will receive $7,000 per year for six years, then you’ll have to pay $9,000.

What your calculator is telling you is that you should pay $24,220 for this investment; i.e., it’s worth $24,220 today.