Solving the warnings (5/6): NPV

There are only two warnings left to have a clear guideline on how to solve them. The previous posts were about the Financing, Net Income, Equity and Equity ratio warnings. Let’s get a look deep into the NPV warning.

NPV is short for Net Present Value. You may find more about it at the Financial Analysis Manual. If the warning is triggered it means that your project has a negative NPV (it does not have financial feasibility under the assumptions that you have set).

The NPV is negative, so what can you do?

The NPV is the sum of yearly cash flows of the project (adjusted by the present value) and you can check on the feasibility report how is the Net Present Value being calculated and on which years it is negative.

Remember that CASFLOAPP’s NPV is calculated as a sum of the present value (corresponds to the discounted FCFF) for the first 5 years and a perpetuity (the calculation is explained here).

If you have a negative NPV, you should first investigate your operational results and then your feasibility assumptions. If it is still wrong, then your project may not be as good as you may have thought. As said on the post about the Equity warning, not every project or idea has feasibility and is meant to become a reality.

 

The next and final post about the warnings will be about solving the Debt coverage warning. Stay tuned!