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Note: This is not a homework. I teach myself some financial principles and I made up this example to find out if I understood these principles. This example is a just a normal example nothing is real.

Example: I suppose I own a small company, the company wanted to go on a project of making dolls for instance. The initial investment let's say = $200,000 just for example. The firm expects the return after 3 years and it will be $400,000 (just for example). Suppose the project as risky as stocks and investment in stocks offers return of r = 13%.

The Opportunity cost of capital = 13%

PV = 400,000/1.13^3 = 277,220

NPV = 2277,220 - 200,000 = 2077220

Rate of return = profit / investment = -200,000 + 277,220 / 200,000 = 0.39 [39%]

Are my calculations right ? if not, please correct them.

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You are over-doing the math. Your NPV has a magical $2 million that shouldn't be there, and your profit should be a nominal amount.... Not the NPV.

Your npv should show 277,220 - 200000 = 77,220.

The actual cash you get back is $400,000. So profit is 400K - 200K =$200K. Profit margin is 100%.

To compare profit margins or % returns apples to apples, the comparison that you have to do is to take 13% compounded for the three years and see what that looks lke against the 100%, or take the CAGR of the 100% and compare to 13%.

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  • I hope your math is better... – user3786562 Aug 10 '14 at 19:45

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