Question

How will uncertainty regarding the labor situation can affect the NPV of the project?

Answer 1

Question :

Solution :

Net Present Value ( NPV ) is the minimum rate of return on any project .In other words,to analyze the profit of a project NPV is calculated  in terms of inflows and outflows .

The difference between Present value of receipts and expenditures called as NET PRESENT VALUE ( NPV ) . .This lies under discounting criteria. The following formula use to calculate

NPV = ∑ R_t / ( 1+ i ) ^t

where t lies from 1 to n and

R_t = Net cash inflow and outflow at t time period

i= discount rate

t = no. of time period

How will uncertainty regarding the labor situation can affect the NPV of the project?

It would depend on labor situation at different situation i.e.,

1 ) Availability of Labor ( skilled / semi skilled / unskilled ) affect the NPV value as with the highly skilled or semi -skilled labor availability would helpful in generating the maximum profit. On the other side unskilled labor would not so much profitable for the project.

2 ) Labor rates includes past trends, prevailing and projected labor rates which shows that if on low (cheapest ) wages large no. of laborers are ready to work then it would be more profitable to calculating NPV value for any project. If labor is not ready to work at prevailing wage rate then, it could generate huge amount of internal cost for a project.

3 ) Labor management includes issues related to labor, strikes frequencies and attitude of labor towards work . If this type of management holds strong command on labor concerns then this would be profitable to NPV valuation. If issues related to labor not preferable in a project then this could generate inconsistency in labor productivity.

4 ) Research and development on every aspect of labor efficiency would ultimately profitable to project. But without the adoption of new technologies and improvement labor efficiency would be diminish . so, it could be not profitability.

Hence , these are the uncertainty regarding labor efficiency for any project to get profitable NPV.