Help

[cathy Livingstone]

Both you and Doug have hit on the problem I'm having. First, what
management is trying to do is to determine how this purchase could affect
what they call 'cost savings'. So they've isolated it from current inflows
and outflows. The problem is that they calculate *separate* NPVs for the
affected income flows (cost savings) and for capital. Then they subtract
the one NPV from the other to get the total NPV. This seems rather bizarre
to me.  The depreciation is considered straight-line (so that after 10
years, $5 million). So I guess the question is, is the NPV appropriate as a
measure applied to capital by itself (since the 'net' part seems to be
meaningless) and if so, what does it mean? I should also say that I tried
straight Present Value to calculate this and am no further ahead. This
corporation uses a lot of weird and wonderful methods of costing (for
example, some union benefit packages cost 175% of wages - we wish!) so it
wouldn't surprise me if this is another one. Thanks again

Cathy

At 12:16 PM 4/20/1999 -0400, you wrote:
>
>> Could any of you financially astute LBO'ers help me
>> out with this one.
>
>Probably not but I'll give it a shot.
>
>> . . . 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. >
>
>It sounds like the $11 mill refers to the net present value of
>in-go and out-go over the first ten years.  To calculate this you
>need to know at least three things:  the stream of income from
>the asset, the expenses associated with earning this income, and
>the depreciation of the asset.  You have not supplied enough
>information to do the problem.  You speak of two "blips", but you
>do not state the counter-factual to the blips -- the 'normal'
>in-go, out-go, and depreciation.
>
>If you take the $11.73 mill, the ten year period, the discount
>rate, and the "blips" as given, then by some numerical method you
>might be able to solve for the net for each of the ten years.
>This doesn't seem to lend itself to solution by a calculator --
>more likely a program like Mathcad or some financial textbook
>software.
>
>If you know the net for each of the ten years (income less
>expenses less depreciation), abstracting from taxes, then you
>must do is divide the net by the proper discount factor for each
>year, then add them up.  The discount factor for a given year is
>(1.08) raised to the power of the year in question (where the
>first year is 'year one') minus one.  Thus if the net for year 3
>is $100,000, you need to divide it by 1.08^2 (e.g., year 3 minus
>1 means you square 1.08).
>
>> 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.
>>
>
>If you're trying to replicate the company's number, you need to
>know how they depreciate, along with their numbers for in-go and
>out-go.
>
>mbs
>
>
>