NPV of cashflows to assess contribution to a joint venture

[Guest]

I am reviewing someone's assesment of a project's contribution to a Joint
Venture. The project has been running for a few years. The NPV of this
project cashflow is being calculated and then added to other projects to come
up with % contributions calc. (i.e. NPV of X+ NPV of Y = 100%, if NPV X = 10
then X = 10% contriubtion of all assets).

I have a stream of cashflows for an existing asset which are assumed to be
annual and based on calendar year-end. Asumed the dates range from
12/31/2008 to 12/31/2013 (6 periods) and the cashflow is $10 per period.

If I discount this flow using an NPV @ 8.6% my present value is $45.40.
Does this implicitly assume my time 0 date is 12/31/2007 (i.e. 365 days prior
to my first period end date).

The reason I ask is that the analysis I am looking at NPVs the cashflows
using the dates above but then adds in the undiscounted value of year end
2007 to the NPV(2008-2013). Is the assumption here that as I am discounting
back to 12/31/2007 in my NPV and that my forecasetd 2007 cashflow are
year-end as well that I would implicitly add these two value together.

I originally assumed that the calc would simply be an NPV for 2008-2013.
But the more I think about it, it makes sense if the time 0 calc is
12/31/2007.

Thanks

EM

 

[Guest]

Actually I think this is incorrect as the NVP of the cashflow should reflect
the JV's rights to the cashflow from 2008-2013. As the JV does not have
access or rights to the 2007 cashflow, they should not be included in the
valuation of the project.

Sorry for the long-winded question.

EM

 

[joeu2004]

I have a stream of cashflows for an existing asset which are assumed to be
annual and based on calendar year-end. Asumed the dates range from
12/31/2008 to 12/31/2013 (6 periods) and the cashflow is $10 per period.

If I discount this flow using an NPV @ 8.6% my present value is $45.40.
Does this implicitly assume my time 0 date is 12/31/2007 (i.e. 365 days
prior to my first period end date).

Notwithstanding you apparent disinterest in the solution (if I
understand your follow-up correctly), you question can be answered.

Your observation is essentially correct. See the mathematical formula
on the NPV Help page. Notice that j starts at 1, not zero.

I think it is more correct to say that the Excel NPV function assumes
that the first cash flow in its argument list is CF1, the first period
after the initial cash flow (typically denoted as CF0).

In other words, you should not include the initial cash flow in the
NPV arguments. You should simply add CF0 to the NPV result. Unless,
of course, you would like to roll back the net present value to a
period before the first cash flow.