I'm working on a critique of a major public corportation's latest strategic planning initiative. The main financial focus of this initiative is Net Present Value. While I've managed to understand how this works (and its meaning) with regards to cash inflows and outflows, I don't get it when it comes to capital investments. The way it is used by this corporation is the following:
a $20 million capital asset with a life of 40 years, calculating the Net Present Value over 10 years with a discount rate of 8%. The result, they say is approximately ($11,730,000). There are two blips: in the second year a smaller capital investment of $500,000 and a third year one-time payment of $100,000.
First, I've tried all sorts of calculations and just do not get the $11.7 mil. I've tried initially depreciating the capital (to approx. $15 mil) and even tried compounding that depreciation. You can see how desperate I am.
What I'd really like to know is two-fold: 1) what does this $11.7 million actually *mean*? and 2) how do I get it? Probably if you could answer the first I could probably eventually figure out the second.
Thanks for any help
Cathy