The Net Present Value (NPV) in project assessment is a term used to differentiate between the present value of cash outflows also known as the expenditure and the present value of cash inflow or else income stream. Each future cash flow is discounted by specified percentages which represent an opportunity cost that holds the capital at year zero within a specified period of time for instance like in the Boeing mini case the period shown is 34 years (baker).
The formula employed in calculating the Net Present Value is as shown below.
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 ..., where:
CF 1 shows the income flow the project managed to produce in the first year,
CF2 the income received in the second year etc.
CF0 shows the capital invested into the project
Whereas r the rate of discount employed in calculating the NPV (baker).
According to Baker, NPV methodology is extensively used in analyzing the estimates of project profitability and also in capital budgeting in undertaking projects or investments. This analysis is known to be very sensitive as it majorly relies on income inflows yielded by a project.
In this mini case, which entails the Boeing Corporation whereby the company had plans to build up a new plane of which the project was estimated to be an enormous undertaking by the company. The company spent close to $ 873 million for almost two and half years in research and development on the new plane project. Other expenditures incurred during development were estimated to be between $4-5 billion. Working capital rose up to $1;7 billion for a period of six years whereas training of personnel and facilities production expenditure totaled to $2.0 billion.
IRR generally known as the internal rate of return is termed as the rate of return where the proposed or else undertaken project’s NPV equals to zero. At this place the cash flow of the project equals its costs or else the project’s expenditure and capital investments (OneMint).
Payback of the Boeing Corporation project is visualized to be going in a downward trend as interpreted in the calculation of NPV. This project’s Net Present Value is less than zero in fact it’s a negative value which clearly shows that the projects income will keep on dwindling and decreasing as years goes by. This would definitely scare investors away or else the company’s stockholders. Therefore in my opinion the Boeing Corporation did well to terminate the project as it would not bring any positive incomes to the company in terms of profits. The expenditure used in building up the project is estimated to be much than the profits the Corporation would get so it is unwise it to continue with this project.
Whether Boeing should go ahead with the project
From the above calculations, we have a negative NPV. If NPV is negative, it means that the project is in a discounted cash flow status in the given time. Therefore, with a negative NPV, it means that the investment would subtract value from the firm and as such should be rejected. As such, I will advice Boeing to never go ahead and implement a project with a negative NPV as it is expected to loose money. However, Boeing should understand that NPV is limited by guesses about what may happen in the future and the usefulness of NPV relies on the accuracy of the expected returns at a discounted rate. For example, if the discounted rate is too low, then the NPV value may reflect an overestimation of the potential of a project.