CF0 -160,000.

00
CF1
60,000.00 Net Income 1
CF2
70,000.00 Net Income 2
CF3
90,000.00 Net Income 3

0.00
0.00
0.00
Your required return for
assets of this risk
Average Book Value

15%
0.00

Capital Budgeting:
Acquire long-term assets
Because long-term assets:
Determine the nature of the firm
Are hard decisions to reverse
They are the most important decisions for the financial manager
Selecting Assets
Whish assets to invest in?
There are many options.
Which do we pick?
Determine Value of Asset
When market or exisits for asset or similar
assets, use market value
NPV = Cost - Market Value
When we cannot observe a market price for
at least a roughly comparable investment, we
use Discounted Cash Flow Valuation
NPV = Cost - DCF

1
2
3
4

Rules for DCF or NPV

Estimate the expected future cash flows (Chapter 9)
Estimate the required return for projects (investments) of this risk level (Chapter 10, 11)
Find the present value of the cash flows and subtract the initial investment (Chapter 8)
NPV >0, project will add value to firm.

Annual Discount Rate = RRR =

Cash Flow 0 (Cost)
Cash Flow 1
Cash Flow 2
Cash Flow 3

0.15
-$200,000.00
$100,000.00
$90,000.00
$70,000.00

Period
1
2
3
Price willing to pay

Value added by buying at

$200,000 = NPV =

Cash Flows

Annual Discount Rate = RRR =

Cash Flow 0 (Cost)
Cash Flow 1
Cash Flow 2
Cash Flow 3

0.15
-$200,000.00
$100,000.00
$90,000.00
$70,000.00

Period

Cash Flows
1
-$86,956.52
2
-$68,052.93
3
-$46,026.14
Price willing to pay
-$201,035.59
Because (cost of asset $200,000) <=
(what we are willing to pay $201,036),
we will buy.

Value added by buying

at $200,000 = NPV =

=PV($B$1,D2,,B3)
=PV($B$1,D3,,B4)
=PV($B$1,D4,,B5)
=SUM(E2:E4)

$1,035.59 =-E5+B2

Annual RRR (Discount)

Cash Flow 0 (Cost)
Cash Flow 1
Cash Flow 2
Cash Flow 3
NPV =Value added to firm if
project is undertaken

0.15
-$200,000.00
$100,000.00
$90,000.00
$70,000.00

NPV Excel Function & For

NPV Function:
=NPV(rate,value1,value2)

rate = Period Discount Rate =

value1 = Range of cells with c
Cash flows must happen at th
period.

=NPV(rate, value1, value2, ) + CF0

=NPV(i/n, CF1, CF2, ) + CF0
Note: value1 can be the whole range of cash
flows

Cash flows start at time 1.

Never include cash flows at time 0 (

Cash flows do not have to be

Time between each cash flow

NPV Formula when cost is

=NPV(rate,value1,value2

ction & Formula

1,value2)

iscount Rate = i/n.

of cells with cash flows.
t happen at the end of each

at time 1.
h flows at time 0 (zero).

ot have to be equal in amount.

each cash flow must be the same.

hen cost is at time 0:

alue1,value2) - Cost
12

Annual RRR (Discount)

Cash Flow 0 (Cost)
Cash Flow 1
Cash Flow 2
Cash Flow 3
NPV =Value added to firm if
project is undertaken

0.15
-$200,000.00
$100,000.00
$90,000.00
$70,000.00

NPV Excel Function &

NPV Function:
=NPV(rate,value1,value2

rate = Period Discount R

value1 = Range of cells
Cash flows must happen
period.

$1,035.59 =NPV(B1,B3:B5)+B2

=NPV(rate, value1, value2, ) + CF0

=NPV(i/n, CF1, CF2, ) + CF0
Note: value1 can be the whole range of cash
flows

Cash flows start at time 1.

Never include cash flows at t

Cash flows do not have

Time between each cash

NPV Formula when cos

=NPV(rate,value1,v

Function & Formula

on:
alue1,value2)

riod Discount Rate = i/n.

Range of cells with cash flows.
s must happen at the end of each

s start at time 1.
ude cash flows at time 0 (zero).

s do not have to be equal in amount.

ween each cash flow must be the same.

la when cost is at time 0:

ate,value1,value2) - Cost
12

Should we launch new product that will be around 5 years that has
these cash flows?
+ NPV: Accept

$1

$0
$0
20%

17%

$0
14%

Annual RRR (Discount)

0.2
NPV
Answer:
No
IRR
NPV Profile
Annual RRR (Discount) + NPV: Accept
-NPV: Reject
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%

$1

11%

80,000.00
60,000.00
40,000.00
35,000.00
18,000.00

8%

Required Rate Of Return

$1

Net Cash Flows

5%

All Cash Out All Cash In

-100,000.00
-28,000.00
-16,500.00
-15,000.00
-10,000.00
-20,000.00

NPV

Time
Time 0
Time 1
Time 2
Time 3
Time 4
Time 5

RRR (Discount)

35%
36%

+ NPV: Accept

-NPV: Reject

RRR (Discount)

35%

32%

29%

26%

23%

20%

17%

Check

Should we launch new product that will be around 5 years that

has these cash flows?
All Cash Out All Cash In
-100,000.00
-28,000.00
-16,500.00
-15,000.00
-10,000.00
-20,000.00

Net Cash Flows

80,000.00
60,000.00
40,000.00
35,000.00
18,000.00

Annual RRR (Discount)

NPV
Answer:
No

52,000.00
43,500.00
25,000.00
25,000.00
-2,000.00
0.2
-738.17 =NPV(D11,D5:D9)+B4

NPV Profile
Annual RRR (Discount) + NPV: Accept -NPV: Reject
5%
29,576
6%
27,070
7%
24,647
8%
22,303
9%
20,035
10%
17,840
11%
15,714
12%
13,654
13%
11,658
14%
9,723
15%
7,847
16%
6,027
17%
4,260
18%
2,545
19%
880
20%
-738
21%
-2,310
22%
-3,838
23%
-5,324
24%
-6,769
25%
-8,175
26%
-9,544
27%
-10,876
28%
-12,173
29%
-13,436
30%
-14,667
31%
-15,866
32%
-17,035
33%
-18,175
34%
-19,287

40,000
30,000
20,000

NPV

Time
Time 0
Time 1
Time 2
Time 3
Time 4
Time 5

10,000

-10,000
-20,000
-30,000

-738
-2,310
-3,838
-5,324
-6,769
-8,175
-9,544
-10,876
-12,173
-13,436
-14,667
-15,866
-17,035
-18,175
-19,287

35%
36%

-20,371
-21,430

-20,371
-21,430

Check
-43333.3
-30208.3
-14467.6
-12056.3
803.7551

-738.17

40,000

+ NPV: Accept

-NPV: Reject

30,000
20,000

Hurdle Rate (IRR) is rate that makes NPV = 0

10,000
0
5% 8% 11% 14% 17% 20% 23% 26% 29% 32% 35%
-10,000
-20,000
-30,000

Discount Rate
Market Rate
Required Rate Return (RRR)

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
0.15

RRR (Discount)
NPV =

1 Rule adjusts for the time value of money

2 Rule adjusts for risk (RRR - Discount Rate)
3 Rule provides information on whether we are creating value for the firm

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
RRR (Discount)
0.15
NPV =
$4,280.43 =NPV(B6,B3:B5)+B2
Accept because project has positive NPV
1 Rule adjusts for the time value of money
2 Rule adjusts for risk (RRR - Discount Rate)
3 Rule provides information on whether we are creating value for the firm

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00

Years Required to Pay

Back Investment

Year

Amount Left To Pay Back

1
2
3

Pay Back In Years

Cash Still To
Recover

2 + $30,000/$90,000

1
2
3
4

Total Cash
For Year

Rule DOES NOT adjusts for the time value of money

Rule DOES NOT adjusts for risk (RRR - Discount Rate)
Rule DOES NOT provides information on whether we are creating value for the firm
People use it because it is: 1) easy, 2) costs little, 3) favors projects that free up cash quickly - biased

g value for the firm

ts that free up cash quickly - biased toward liquidity

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00

Years Required to Pay

Back Investment

Year

Amount Left To Pay Back

100,000.00 =-B2-B3
30,000.00 =B9-B4
-60,000.00 =B10-B5
=A10+B10/B5 =
Pay Back In Years
2.33 2 1/3 years
Reject because 2.33 > 2
1
2
3

1
2
3
4

Cash Still To
Recover

2 + $30,000/$90,000

Total Cash
For Year

Rule adjusts for the time value of money

Rule adjusts for risk (RRR - Discount Rate)
Rule provides information on whether we are creating value for the firm
People use it because it is: 1) easy, 2) costs little, 3) favors projects that free up cash quickly - biased

ts that free up cash quickly - biased toward liquidity

Years Required to Pay Back Investment = 2

Year
Pro A
Pro B
0
-$250
1
125
2
125
3
-250
4
250

Accept or Reject?

Problems:

Pro C
$250
100
100
100
100

Yes, but is it year 2 No. Because only

or 4?
$200 by year 2.

We get 2 answers
NPV =
Required Return:

-$250
100
200

Yes. Because $300

Cash In by year 2.
This project has a
negative NPV Ignores cash flows ignores time value
after year 2.
of $.
$35.50
-$11.81
0.15

Year 1
Revenue
Expenses (including
Depreciation and Tax)
Net Income

$80,000
$67,000

Year 2
Year 3
$70,000
$65,000
$45,000

$45,000

Average Net Income

Original Cost
Salvage
Years
Striaght Line Deprectaion

$180,000
$0
3
Time 0

Time 1

Time 2

Time 3

Book Value = Historical

Cost - Accumulated
Depreication
Average Book Value
Average Book Value
AAR
Target AAR
Decision:

0.25
Reject Project
1
2
3
4

Average Net Income

Average Book Value

Rule DOES NOT adjusts for the time value of money

Rule DOES NOT adjusts for risk (RRR - Discount Rate)
Rule DOES NOT provides information on whether we are creating value for the firm
Accounting information is almost always available

= AAR

Note that the average book value depends

on how the asset is depreciated.

g value for the firm

Year 1

Year 2
Year 3
$70,000
$65,000

Revenue
Expenses (including
Depreciation and Tax)
Net Income

$80,000

Average Net Income

$19,333 =AVERAGE(B4:D4)

Original Cost
Salvage
Years
Striaght Line Deprectaion

$67,000
$13,000

Average Net Income

Average Book Value

Time 1

$180,000

Average Book Value

Average Book Value
AAR
Target AAR
Decision:

$45,000
$20,000

$180,000
$0
3
$60,000 =(B8-B9)/B10
Time 0

Book Value = Historical

Cost - Accumulated
Depreication

$45,000
$25,000

$120,000

Time 2

$60,000

$90,000 =AVERAGE(B14:E14)
$90,000 =B8/2
0.214814815 =B6/B17
0.25
Reject Project
= AAR

Note that the average book value depends

on how the asset is depreciated.

Time 3

$0

Year 1
Revenue
Expenses (including
Depreciation and Tax)
Net Income
Original Cost
Salvage
Years
Striaght Line Deprectaion

$80,000
$67,000
$13,000

ROA
Average ROA

ROA
Average ROA

$45,000
$25,000

$45,000
$20,000

$180,000
$0
3
$60,000 =(B8-B9)/B10
Time 0

Book Value = Historical

Cost - Accumulated
Depreication

Year 2
Year 3
$70,000
$65,000

$180,000

Time 1

$120,000

Time 2

$60,000

Year 1
Year 2
Year 3
0.086666667 0.2777778 0.6666667
0.343703704
or
Year 1
Year 2
Year 3
0.072222222 0.2083333 0.3333333
0.20462963

Time 3

$0

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
0.12

Required Rate Of Return

IRR =

Discount Rate

+ NPV
0
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
0.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%

- NPV

IRR Excel Function

IRR Function:
=IRR(values,guess)

values = range of cells with cash flows. Cash out is

negative, cash in is positive. Range of values must conta
at least one positive and one negative value.
Guess is not required. But if you get a #NUM! error, try
different guesses ones you think might be close.
Cash flows must happen at the end of each period.

Cash flows start at time 0.

Cash flows do not have to be equal in amount.

Time between each cash flow must be the same.
IRR gives you the period rate. If you give it annual cash
flows, it gives you annual rate, if you give it monthly cas
flows, it gives you monthly rate.

flows. Cash out is

ge of values must contain
gative value.
get a #NUM! error, try
nk might be close.
nd of each period.

ual in amount.
ust be the same.
you give it annual cash
you give it monthly cash

Project Cash Flows

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
Required Rate Of Return
0.15
IRR =
0.16499266 =IRR(B2:B5)
If the Required Return is less than or
equal to 16.499%, then accept,
otherwise, reject project.
Because 15.00% <= 16.50%, we accept
the project.
When RRR is 16.50%, NPV = 0
Discount Rate
0
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%

+ NPV
16.50% = IRR ==>-(NPV
NPV = 0)
60,000.00
55,379.78
50,914.35
46,596.89
42,420.91
38,380.30
34,469.26
30,682.29
27,014.17
23,459.98
20,015.03
16,674.85
13,435.22
10,292.13
7,241.74
4,280.43
1,404.73
0.00
0
-1,388.65
-1388.65
-4,102.85
-4102.85
-6,740.87
-6740.87
-9,305.56
-9305.56
-11,799.63
-11799.6
-14,225.68
-14225.7
-16,586.20
-16586.2
-18,883.56
-18883.6
-21,120.00
-21120
-23,297.70
-23297.7
-25,418.72
-25418.7
-27,485.05
-27485
-29,498.56
-29498.6

$80,000
NPV = Value Of Asset/Liability

CF0

$60,000
$40,000
$20,000
$0
0

2% 4% 6%

-$20,000
-$40,000

y = 441781x2 - 432612x + 59208

30%

-31,461.08

-31461.1

16.50% = IRR ==> (NPV = 0)

6% 8% 10% 12% 14% 16% 17% 19% 21% 23% 25% 27% 29%

Discount Rate
Market Rate
Required Rate Return (RRR)

+ NPV
- NPV

x
rate
coefficient of x^2
441781
coefficient of x
432612
intercept
59208
x
11.00%
f(11.00%) =
16966.23

Project Cash Flows

Required Rate Return

Increment
RRR (Discount)
14.0%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%

+ NPV
7,241.74
5,750.17
4,280.43
2,832.09
1,404.73
-2.05
-1,388.65
-2,755.46
-4,102.85
-5,431.20

Project Cash Flows

CF0

-1,000.00

CF1

1,200.00

Solve for directly when

exponent is 4 or less (But no
need to).
NPV = -CF0 + CF1/(1+IRR)
0 = -1,000 + 1,200/(1+IRR)
1,000 = 1,200/(1+IRR)
1 + IRR = 1,200/1,000
IRR = 1,200/1,000 -1
IRR = 0.2

$4,000
$2,000

- NPV

$0
-$2,000
-$4,000
-$6,000

-2.05
-1,388.65
-2,755.46
-4,102.85
-5,431.20

-$8,000

RRR (Discount)

17.0%

90,000.00
0.15
0.005

16.5%

CF3

$6,000

16.0%

70,000.00

15.5%

CF2

15.0%

60,000.00

14.5%

CF1

$8,000

14.0%

-160,000.00

NPV

CF0

18.5%

18.0%

17.5%

17.0%

+ NPV

- NPV

Non-conventional Cash Flows

Cash Out
Cash In
Net Cash Flow
Cash Flow 0
-$61,000
$0
-$61,000
Cash Flow 1
-$46,485
$206,000
$159,515
Cash Flow 2
-$149,000
$46,485
-$102,515
RRR
15%
IRR
NPV
RRR

NPV
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%

Cash Flow 0 = -61,000

Cash Flow 1 = 159,515
Cash Flow 2 = -102,515

45%
46%
47%
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%

Non-conventional Cash Flows

Cash Out
Cash In
Net Cash Flow
Cash Flow 0
-$61,000
$0
-$61,000
Cash Flow 1
-$46,485
$206,000
$159,515
Cash Flow 2
-$149,000
$46,485
-$102,515
RRR
15%
14%
$192.63

IRR
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%

NPV
($709.50)
($496.27)
($300.22)
($120.57)
$43.47 Is IRR 14%?
$192.63
$327.59
$449.01
$557.53
$653.73
$738.19
$811.45
$874.03
$926.40
$969.04
$1,002.40
$1,026.90
$1,042.94
$1,050.90
$1,051.17
$1,044.08
$1,029.98
$1,009.18
$981.99
$948.71
$909.60
$864.94
$814.99
$759.98
$700.14
$635.71
$566.90
$493.90
$416.92
$336.13

$1,500.00

Is IRR
14%?

$1,000.00
$500.00
$0.00
NPV

IRR
NPV

Cash Flow 0 = -61,000

Cash Flow 1 = 159,515
Cash Flow 2 = -102,515

($500.00)

0%

20%

40%

($1,000.00)
($1,500.00)
($2,000.00)
($2,500.00)
($3,000.00)

RRR (Discount)

45%
46%
47%
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%

$251.72
$163.87
$72.72
($21.55) Is IRR 48%?
($118.80)
($218.89)
($321.67)
($427.03)
($534.82)
($644.92)
($757.23)
($871.63)
($988.01)
($1,106.27)
($1,226.32)
($1,348.05)
($1,471.37)
($1,596.21)
($1,722.48)
($1,850.09)
($1,978.97)
($2,109.05)
($2,240.26)
($2,372.52)
($2,505.78)
($2,639.97)

R (Discount)

Is IRR
48%?

60%

80%

Mutually Exclusive Projects (Investements)

RRR

10%

Period
0
1
2
3
4

Cash Flow A
Cash Flow B Diff
-5,500.0
-5,500.0
2,500.0
1,100.0
2,200.0
2,200.0
2,200.0
2,750.0
1,650.0
3,000.0

IRR
NPV

RRR
(Discount) NPV A
0%
2.50%
5%
7.50%
10%
12.50%
15%
17.50%
20%
22.50%
25%
28%
30.00%
33%
35.00%

Cross Over Rate = 00.00%

3,550.0

NPV B

Mutually Exclusive Projects (Investements)

10%

Period
0
1
2
3
4
IRR
NPV

Cash Flow A
Cash Flow B Diff
Cross Over Rate = 11.98%
-5,500.0
-5,500.0
0.0
11.981%
2,500.0
1,100.0
1,400.0
$4,000.00
2,200.0
2,200.0
0.0
2,200.0
2,750.0
-550.0
1,650.0
3,000.0 -1,350.0
$3,000.00
0.21829
0.19857
3,550.0
1,370.77
1,433.34

RRR
(Discount) NPV A
NPV B
0%
$3,050.00
$3,550.00
2.50%
$2,570.75
$2,938.66
5%
$2,134.32
$2,386.74
7.50%
$1,735.75
$1,887.03
10%
$1,370.77
$1,433.34
12.50%
$1,035.71
$1,020.35
15%
$727.36
$643.47
17.50%
$442.93
$298.72
20%
$179.98
($17.36)
22.50%
($63.63)
($307.79)
25%
($289.76)
($575.20)
28%
($500.09)
($821.92)
30.00%
($696.07) ($1,049.98)
33%
($879.02) ($1,261.19)
35.00%
($1,050.08) ($1,457.13)

NPV A

NPV B

$2,000.00

NPV

RRR

$1,000.00
$0.00
0%

10%

20%

($1,000.00)
($2,000.00)

RRR (Discount)

NPV B

RRR (Discount)

30%

40%

15.0%
-6,660.00
17,205.00
-11,100.00

RRR (Discount)

0 CF0
1 CF1
2 CF2
Method 1: Discounting Approach
CF0
CF1
CF2

-6660 + -11100/(1+0.15)^2 =
17205
0

If you know the Discount

rate, why not just use NPV?

MIRR =
Method 2: Reinvestment Approach
CF0
CF1
CF2

-6660
0
-11100 + 17205*(1+0.15) =
MIRR =

Once cash comes into firm,

it may or may not be
reinvested at RRR.
Once cash comes in, it can
be used for any number of
things

Method 3: Combination Approach

CF0
CF1
CF2

-6660 + -11100/(1+0.15)^2 =
0
17205*(1+0.15) =
MIRR =

MIRR
GEOMETRIC mean

3 different methods?
Not just one method,
like with NPV.

15.0%
-6,660.00
17,205.00
-11,100.00

RRR (Discount)

0 CF0
1 CF1
2 CF2
Method 1: Discounting Approach
CF0
CF1
CF2

-6660 + -11100/(1+0.15)^2 =
17205
0

-15,053.19
17,205.00
0.00
14.29%

MIRR =
Method 2: Reinvestment Approach
CF0
CF1
CF2

-6660
0
-11100 + 17205*(1+0.15) =

-6,660.00
0.00
8,685.75
14.20%

MIRR =

If you know the Discount

rate, why not just use NPV?

Once cash comes into firm,

it may or may not be
reinvested at RRR.
Once cash comes in, it can
be used for any number of
things

Method 3: Combination Approach

CF0
CF1
CF2

-6660 + -11100/(1+0.15)^2 =

MIRR =

-15,053.19
0.00
19,785.75
14.6467952%

MIRR
GEOMETRIC mean

14.6467952%
14.6467952%

0
17205*(1+0.15) =

3 different methods?
Not just one method,
like with NPV.

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
0.12

RRR (Discount)

Profitability Index
PI > 1 ==> Add Value to Firm
PI < 1 ==> Subtract Value to Firm
Amount Added per $1 invested
$173,435.22/$160,000.00
$0.0840 / $1
Sometimes used when investment funds are
limited and you want to see "For every $1
invested, how much value would be added".

Disadvantages
May lead to incorrect decisions in
comparisons of mutually exclusive
investments
Scale is not revealed
10/5 = 1000/500

correct decisions in
mutually exclusive

Project Cash Flows

CF0

-160,000.00

CF1

60,000.00

CF2

70,000.00

CF3

90,000.00
0.12

RRR (Discount)

Profitability Index
PI > 1 ==> Add Value to Firm
PI < 1 ==> Subtract Value to Firm

1.0840

Amount Added per $1 invested

$0.0840

$173,435.22/$160,000.00
$0.0840 / $1
Sometimes used when investment funds are
limited and you want to see "For every $1
invested, how much value would be added".

Disadvantages
May lead to incorrect decisions in
comparisons of mutually exclusive
investments
Scale is not revealed
10/5 = 1000/500

correct decisions in
f mutually exclusive

1)

Preset Value = How much future cash flows are worth today.
Think of it as interest going backwards; if we put money in the
bank today (present value) it will be worth some future value
amount in the future: Present Value is the Opposite! We want to
receive some cash amounts in the future, what amount do we
have to put in the bank today?

PV function calculates present Value when the cash flows are the
same and are separated by regular time periods. NPV function
lets us calculate the present value when the amounts are not the
same. XNPV function lets us calculate the present value when
2) the amounts are not the same and the times are not the same.

3)
4)

5)
6)

7)

8)

When an asset has an annuity cash flow pattern, you c

Capital Investment Decision. An annuity has equal paym
Calculates the net present value for a series of cash flow
between each cash flow)
Returns the net present value for a schedule of cash f
=XNPV(rate, values, dates) NOTE: you can include Cash Flow at periodic. To calculate the net present value for a series
time 0.
use the NPV function.
Cash Flow matters in Finance. Cash going out of the wallet is
negative. Cash coming into the wallet is positive.
For the borrow the PV is positive, the PMT is negative, and the
FV is negative. For the Lender the PV is negative, the PMT is
positive, and the FV is positive.
Be consistent with your unit of time! If you are calculating monthly
payment, you need monthly interest rate and total number of
months! (The period can be monthly, quarterly, yearly or any
other length).
=PV( rate, nper, fv, type)
=NPV( rate, CF1, CF2. (as range or cells separated by
commas). NOTE: You cannot include Cash Flow at time 0.

You are considering buying a machine that will yield $35,000.00

net cash flow in for the next ten years. If you must earn a
minimum return on investment of 15.00%, should we buy a
machine if it costs ($165,500.00)?
1

35,000.00

Net Cash Flow at end of each year =

Min Return (hurdle rate or Discount Rate) =
Cost =
Years
PV =
Difference =
NPV =
2

15%

-165,500.00
10
RRR
NPV =

Period

CF
0
1
2
3
4
5
6

35,000.00
35,000.00
35,000.00
35,000.00
35,000.00
35,000.00

CF
-165,500.00
40,000.00
40,000.00
40,000.00
35,000.00
35,000.00
35,000.00

15%

7
8
9
10

35,000.00
35,000.00
35,000.00
35,000.00

3 RRR

20,000.00
10,000.00
50,000.00
2,500.00

0.15

Date

Year
1/1/2007
1/1/2008
1/1/2010
1/1/2011
1/1/2012
1/1/2013

1/1/2009
366

0
1
3
4
5
6

CF
PV function XNPV algorithm
-500.00
-500.00
-500.00
200.00
173.91
173.91
100.00
65.75
65.73
100.00
57.18
57.15
100.00
49.72
49.70
100.00
43.23
43.20
-110.21
-110.31

ty cash flow pattern, you can use

nvestment Decision. An annuity
s at equal time intervals.
alue for a series of cash flows that
e between each cash flow)
e for a schedule of cash flows that
o calculate the net present value
that is periodic, use the NPV

XNPV

Preset Value = How much future cash flows are worth today.
Think of it as interest going backwards; if we put money in
the bank today (present value) it will be worth some future
value amount in the future: Present Value is the Opposite!
We want to receive some cash amounts in the future, what
amount do we have to put in the bank today?
1)

2)

PV function calculates present Value when the cash flows

are the same and are separated by regular time periods.
NPV function lets us calculate the present value when the
amounts are not the same. XNPV function lets us calculate
the present value when the amounts are not the same and
the times are not the same.

When an asset has an annuity cash flow pattern, you can us

Capital Investment Decision. An annuity has equal payme
intervals.

3)

=PV( rate, nper, fv, type)

4)

=NPV( rate, CF1, CF2. (as range or cells separated by

commas). NOTE: You cannot include Cash Flow at time 0.

5)

=XNPV(rate, values, dates) NOTE: you can include Cash

Flow at time 0.

6)

7)

8)

Cash Flow matters in Finance. Cash going out of the wallet

is negative. Cash coming into the wallet is positive.
For the borrow the PV is positive, the PMT is negative, and
the FV is negative. For the Lender the PV is negative, the
PMT is positive, and the FV is positive.
Be consistent with your unit of time! If you are calculating
monthly payment, you need monthly interest rate and total
number of months! (The period can be monthly, quarterly,
yearly or any other length).

You are considering buying a machine that will yield

$35,000.00 net cash flow in for the next ten years. If you
must earn a minimum return on investment of 15.00%,
should we buy a machine if it costs ($165,500.00)?

35,000.00

Net Cash Flow at end of each year =

Min Return (hurdle rate or Discount Rate) =
Cost =
Years
PV =
Difference =
NPV =
2

Calculates the net present value for a series of cash flows th

time between each cash flow)
Returns the net present value for a schedule of cash flows th
periodic. To calculate the net present value for a series of
periodic, use the NPV function.

15%

-165,500.00
10
-175,656.90
10,156.90
10,156.90

Period

CF
0
1

35,000.00

NPV =
CF
-165,500.00
40,000.00

3,991.86

2
3
4
5
6
7
8
9
10

35,000.00
35,000.00
35,000.00
35,000.00
35,000.00
35,000.00
35,000.00
35,000.00
35,000.00

3 RRR

40,000.00
40,000.00
35,000.00
35,000.00
35,000.00
20,000.00
10,000.00
50,000.00
2,500.00

0.15

Date

Year
1/1/2007
1/1/2008
1/1/2010
1/1/2011
1/1/2012
1/1/2013

1/1/2009
366

0
1
3
4
5
6

CF
PV function XNPV algorithm
-500.00
-500.00
-500.00
200.00
173.91
173.91
100.00
65.75
65.73
100.00
57.18
57.15
100.00
49.72
49.70
100.00
43.23
43.20
-110.21
-110.31

nnuity cash flow pattern, you can

Capital Investment Decision. An
ments at equal time intervals.

t value for a series of cash flows

ime between each cash flow)
alue for a schedule of cash flows
odic. To calculate the net present
lows that is periodic, use the NPV

XNPV
-110.31

Time

CF
NI
0 -150,000.00
1
38,500.00
2
38,500.00
3
38,500.00
4
38,500.00
5
38,500.00
6
38,500.00
7
2,000.00

RRR (Discount)
Payback
Required AAR

30,000.00
30,000.00
30,000.00
30,000.00
30,000.00
30,000.00
1,000.00

NPV
IRR
Payback
PI
PI-1
AAR
Year
1
2
3
4
5
6
7
Pay Back In Years

Amount Left To Pay Back

15%
3
0.3

Amount Left To Pay Back

Time

CF
NI
0 -150,000.00
1
38,500.00
2
38,500.00
3
38,500.00
4
38,500.00
5
38,500.00
6
38,500.00
7
2,000.00

RRR (Discount)
Payback
Required AAR

30,000.00
30,000.00
30,000.00
30,000.00
30,000.00
30,000.00
1,000.00

NPV
IRR
Payback
PI
PI-1
AAR
Year
1
2
3
4
5
6
7
Pay Back In Years

Amount Left To Pay Back

111,500.00
73,000.00
34,500.00
-4,000.00
-42,500.00
-81,000.00
-83,000.00
3.90

15%
3
0.3
-3,545.54
0.14
3.90
0.98
-0.02
0.34
Amount Left To Pay Back
111,500.00
73,000.00
34,500.00
-4,000.00
-42,500.00
-81,000.00
-83,000.00

NO
NO
NO
NO
NO
YES

164669741.xls.ms_office - STP8.1
Period
CF0
CF1
CF2
CF3
CF4
RRR (Discount)
NPV
IRR

Project A

Year

Amount Left To Pay Back

-100
50
40
40
15
15%

1
2
3
Pay Back In Years

164669741.xls.ms_office - STP8.1 (an)

Period
CF0
CF1
CF2
CF3
CF4
RRR (Discount)
NPV
IRR

Year

Project A
-100
50
40
40
15
15%
$8.60
19.89%

Amount Left To Pay Back

1
50.00
2
10.00
3
-30.00
Pay Back In Years
2.25

164669741.xls.ms_office - STP8.2

Period Project A
CF0
CF1
CF2
CF3
RRR
NPV
IRR

-100
50
70
40
10%

Project B

Diff

-100
70
75
10
10% Cross Over Rate
1.00%

RRR (Discount)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
0.00000%
11.00%
11.80%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%

1.00%

Project A Project B

Cross Over Rate

0.0000%

NPV

NPV
60.00

55.00

164669741.xls.ms_office - STP8.2 (an)

CF0
CF1
CF2
CF3
RRR
NPV
IRR

-100
50
70
40
10%
$33.36
28.61%

Project B
-100
70
75
10
10% Cross Over Rate
$33.13
32.37%

Diff
0
-20
-5
30
10.61072%

70.00
60.00
50.00

1.00%

RRR (Discount)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
10.61072%
11.00%
11.80%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%

1.00%

40.00

Project A Project B
60.00
56.95
53.99
51.13
48.36
45.66
43.05
51.13
48.36
45.66
43.05
40.52
38.06
35.68
33.36
31.98
31.11
29.35
28.92
26.79
24.72
22.71
20.75
18.85
16.99
15.18
13.43
11.71
10.04
8.41
6.83
5.28
3.77
2.30
0.86
-0.54
-1.91
-3.25
-4.56
-5.83
-7.08
-8.30
-9.49
-10.65
-11.79

55.00
52.54
50.14
47.81
45.54
43.33
41.18
47.81
45.54
43.33
41.18
39.09
37.05
35.07
33.13
31.98
31.25
29.77
29.41
27.61
25.86
24.16
22.49
20.86
19.27
17.72
16.20
14.72
13.27
11.86
10.47
9.12
7.80
6.50
5.23
3.99
2.78
1.59
0.42
-0.72
-1.84
-2.93
-4.00
-5.06
-6.09

NPV

Period Project A

IRR and NPV will rank the projects differently everywhere except where the NPV
Profile lines cross. Less than 10.61%, the NPV for A is higher. Greater than 10.61%,
the NPV for B is Higher. In this case (mutually exclusive projects), it is better to use
the NPV to determine which prject to take.

30.00

Project A

20.00

Project B

10.00
0.00
0.00%
-10.00

10.00%

-20.00

20.00%

30.00%

Discount Rate

Cross Over Rate

10.6107%

NPV

NPV
31.98

31.98

40.00%

Year 1
Year 2
Year 3
Cost
Years
Average Book Value
Average Net Income
ARR

Net Income
1000
2000
4000
9000
3

Year 1
Year 2
Year 3
Cost
Years
Average Book Value
Average Net Income
ARR

Net Income
1000
2000
4000
9000
3
2333.333333
4500
0.518518519

12

Just as YTM was internal rate of cash flows for bonds, IRR will
be internal rate of cash flows for capital budgeting. The two
concepts of YTM and IRR are the identical, except one is related
to CF for a bond and the other is related to cash flows for a
12 capital budgeting project.

164669741.xls.ms_office - HW(7)
CF0
CF1
CF2
CF3
CF4
CF5
CF6
CF7
CF8
CF9
Required Return 1
Required Return 2
IRR = Indifference Rate =

-8900
2150
2150
2150
2150
2150
2150
2150
2150
2150
0.08
0.24

1%
RRR (Discount) NPV
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%
45%
46%
47%
48%
49%

164669741.xls.ms_office - HW(7)
50%

164669741.xls.ms_office - HW(7an)

Required Return 1
Required Return 2
IRR = Indifference Rate =

-8900
2150
2150
2150
2150
2150
2150
2150
2150
2150
0.08
0.24
19.18%

1%
RRR (Discount) NPV
0%
10,450.00
1%
9,516.94
2%
8,648.81
3%
7,840.13
4%
7,085.96
5%
6,381.82
6%
5,723.64
7%
5,107.75
8%
4,530.81 Accept
9%
3,989.78
10%
3,481.90
11%
3,004.65
12%
2,555.74
13%
2,133.06
14%
1,734.70
15%
1,358.91
16%
1,004.07
17%
668.72
18%
351.50
19%
51.16
20%
-233.42
21%
-503.32
22%
-759.49
23%
-1,002.83
24%
-1,234.17 Reject
25%
-1,454.27
26%
-1,663.84
27%
-1,863.53
28%
-2,053.94
29%
-2,235.64
30%
-2,409.15
31%
-2,574.95
32%
-2,733.48
33%
-2,885.18
34%
-3,030.43
35%
-3,169.59
36%
-3,303.00
37%
-3,430.97
38%
-3,553.81
39%
-3,671.78
40%
-3,785.15
41%
-3,894.16
42%
-3,999.02
43%
-4,099.96
44%
-4,197.17
45%
-4,290.84
46%
-4,381.15
47%
-4,468.25
48%
-4,552.31
49%
-4,633.46

15,000.00
10,000.00
NPV

CF0
CF1
CF2
CF3
CF4
CF5
CF6
CF7
CF8
CF9

5,000.00
0.00
0%
-5,000.00
-10,000.00

164669741.xls.ms_office - HW(7an)
50%

-4,711.85

164669741.xls.ms_office - HW(7an)

0%

10%

20%

30%

40%

RRR (Discount)

50%

60%

164669741.xls.ms_office - HW(8,9)
CF0
CF1
CF2
CF3

-32000
13200
18500
10600

IRR = Indifference Rate =

15.84%

1%
RRR (Discount) NPV
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%

164669741.xls.ms_office - HW(8,9an)
-32000
13200
18500
10600

IRR = Indifference Rate =

15.84%

1%
RRR (Discount) NPV
0% 10,300.00 equal to cash flows!
1%
9,493.04
2%
8,711.42
12,000.00
3%
7,954.06
10,000.00
4%
7,219.96
5%
6,508.15
8,000.00
6%
5,817.73
6,000.00
7%
5,147.82
4,000.00
8%
4,497.61
9%
3,866.32
2,000.00
10%
3,253.19 accept
0.00
11%
2,657.54
-2,000.00 0%
12%
2,078.67
13%
1,515.96
-4,000.00
14%
968.79
-6,000.00
15%
436.59
-8,000.00
16%
-81.20
17%
-585.12
18% -1,075.66
19% -1,553.31
20% -2,018.52 reject
21% -2,471.74
22% -2,913.38
23% -3,343.85
24% -3,763.54
25% -4,172.80
26% -4,572.00
27% -4,961.46
28% -5,341.52
29% -5,712.48
30% -6,074.65 reject
NPV

CF0
CF1
CF2
CF3

164669741.xls.ms_office - HW(8,9an)

0%

5%

10%

15%

20%

RRR (Discount)

25%

30%

35%

164669741.xls.ms_office - HW10
Period Project A Project B
difference
CF0
-50000
-50000
CF1
26000
14000
CF2
20000
18000
CF3
16000
22000
CF4
12000
26000
RRR
IRR
NPV
a&b

11.00%

1%
1%
RRR (Discount) Project A Project B
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%
39.00%
40.00%

164669741.xls.ms_office - HW10 (an)

RRR
IRR
NPV

11.00%
11.00%
20.73%
19.46%
$9,259.71 $10,435.03

15.01%

a&b

If we apply the IRR rule, we incorrectly select

Project A. Because the projects are mutually
exclusive, it is best to use NPV. If we use NPV
we would select Project B.

Above the cross over rate of 15.01%, I would

select Project A, below 15.01% I would select B.
Cash Flows for Project A are bigger in the early
years and so at higher rates they are less
affected by discounting (as compared to the
bigger cash flows in the later years for Project
B).

1%
RRR (Discount)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%
39.00%
40.00%

1%
Project A
24,000.00
22,409.70
20,876.87
19,398.75
17,972.72
16,596.33
15,267.26
19,398.75
17,972.72
16,596.33
15,267.26
13,983.35
12,742.52
11,542.85
10,382.49
9,259.71
8,172.86
7,120.41
6,100.88
5,112.87
4,155.07
3,226.22
2,325.15
1,450.71
601.85
-222.46
-1,023.18
-1,801.23
-2,557.49
-3,292.80
-4,007.94
-4,703.68
-5,380.73
-6,039.78
-6,681.49
-7,306.49
-7,915.37
-8,508.70
-9,087.05
-9,650.91
-10,200.80
-10,737.20
-11,260.55
-11,771.31
-12,269.89

Project B
30,000.00
27,845.19
25,777.60
23,792.74
21,886.38
20,054.56
18,293.54
23,792.74
21,886.38
20,054.56
18,293.54
16,599.84
14,970.15
13,401.37
11,890.58
10,435.03
9,032.13
7,679.41
6,374.58
5,115.44
3,899.94
2,726.11
1,592.12
496.21
-563.27
-1,587.89
-2,579.14
-3,538.43
-4,467.09
-5,366.40
-6,237.57
-7,081.74
-7,900.00
-8,693.39
-9,462.90
-10,209.47
-10,933.99
-11,637.31
-12,320.26
-12,983.59
-13,628.05
-14,254.34
-14,863.15
-15,455.10
-16,030.82

40,000.00
30,000.00
20,000.00
NPV

Period Project A Project B

difference
CF0
-50000
-50000
0
CF1
26000
14000
12000
CF2
20000
18000
2000
CF3
16000
22000
-6000
CF4
12000
26000
-14000

10,000.00

Project A
Project B

0.00
0.00%
-10,000.00
-20,000.00

10.00% 20.00% 30.00% 40.00% 50.00%

RRR (Discount)

164669741.xls.ms_office - HW(11)
Period Project X Project Y difference
CF0
-15000
-15000
CF1
6800
7470
CF2
7380
7640
CF3
4900
3810
RRR
NPV
IRR

1%
1%
RRR (Discount) Project X Project Y
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%
39.00%
40.00%

Period Project X Project Y difference

CF0
-15000
-15000
0
CF1
6800
7470
-670
CF2
7380
7640
-260
CF3
4900
3810
1090
RRR
NPV
$4,080.00 $3,920.00
IRR
13.80%
14.01%
9.61%

1%
RRR (Discount)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
37.00%
38.00%
39.00%
40.00%

1%
Project X
4,080.00
3,723.15
3,377.47
3,042.49
2,717.77
2,402.87
2,097.40
3,042.49
2,717.77
2,402.87
2,097.40
1,800.98
1,513.23
1,233.83
962.43
698.74
442.44
193.27
-49.06
-284.79
-514.17
-737.43
-954.80
-1,166.48
-1,372.69
-1,573.60
-1,769.42
-1,960.31
-2,146.45
-2,328.00
-2,505.11
-2,677.93
-2,846.60
-3,011.27
-3,172.05
-3,329.08
-3,482.48
-3,632.36
-3,778.84
-3,922.01
-4,061.99
-4,198.87
-4,332.74
-4,463.70
-4,591.84

Project Y
3,920.00
3,583.45
3,257.11
2,940.55
2,633.38
2,335.21
2,045.69
2,940.55
2,633.38
2,335.21
2,045.69
1,764.48
1,491.24
1,225.67
967.47
716.36
472.09
234.38
3.00
-222.27
-441.67
-655.41
-863.68
-1,066.68
-1,264.58
-1,457.58
-1,645.83
-1,829.49
-2,008.73
-2,183.68
-2,354.49
-2,521.30
-2,684.23
-2,843.41
-2,998.95
-3,150.98
-3,299.61
-3,444.93
-3,587.06
-3,726.08
-3,862.09
-3,995.19
-4,125.46
-4,252.99
-4,377.84

NPV

164669741.xls.ms_office - HW(11an)

5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
-1,000.000.00%
-2,000.00
-3,000.00
-4,000.00
-5,000.00
-6,000.00

10.00%

20.00%

30.00%

40.00%

50.00%

Project X
Project Y

RRR (Discount)

Year

CF
0
1
2

-35,000,000.00
52,000,000.00
-10,000,000.00
7,000,000.00

Total
RRR
NPV
IRR1

10%

IRR2
RRR

NPV
-81%
-80%
-79%
-78%
-77%
-76%
-75%
-74%
-73%
-72%
-71%
-70%
-69%
-68%
-67%
-66%
-65%
-64%
-63%
-62%
-61%
-60%
-59%
-58%
-57%
-56%
-55%
-54%
-53%
-52%
-51%
-50%
-49%
-48%

-47%
-46%
-45%
-44%
-43%
-42%
-41%
-40%
-39%
-38%
-37%
-36%
-35%
-34%
-33%
-32%
-31%
-30%
-29%
-28%
-27%
-26%
-25%
-24%
-23%
-22%
-21%
-20%
-19%
-18%
-17%
-16%
-15%
-14%
-13%
-12%
-11%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%

0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%
45%
46%

47%
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
71%
72%
73%
74%
75%
76%
77%

Year

CF
0
1
2

-35,000,000.00
52,000,000.00
-10,000,000.00
7,000,000.00

Total
RRR
NPV
IRR1

10%
4,008,264.46
25.873%

IRR2

-77.000%

40,000,000.00
30,000,000.00
20,000,000.00
10,000,000.00

-100%

-80%

-60%

0.00
-40% -20%
0%
-10,000,000.00
-20,000,000.00

RRR

NPV
-81%
-80%
-79%
-78%
-77%
-76%
-75%
-74%
-73%
-72%
-71%
-70%
-69%
-68%
-67%
-66%
-65%
-64%
-63%
-62%
-61%
-60%
-59%
-58%
-57%
-56%
-55%
-54%
-53%
-52%
-51%
-50%
-49%
-48%

-38,324,099.72
-25,000,000.00
-14,138,322.00
-5,247,933.88
2,051,039.70
8,055,555.56
13,000,000.00
17,071,005.92
20,418,381.34
23,163,265.31
25,404,280.62
27,222,222.22
28,683,662.85
29,843,750.00
30,748,393.02
31,435,986.16
31,938,775.51
32,283,950.62
32,494,521.55
32,590,027.70
32,587,113.74
32,500,000.00
32,340,868.53
32,120,181.41
31,846,944.29
31,528,925.62
31,172,839.51
30,784,499.05
30,368,945.22
29,930,555.56
29,473,136.19
29,000,000.00
28,514,033.06
28,017,751.48

-30,000,000.00
-40,000,000.00
-50,000,000.00

20%

40%

-47%
-46%
-45%
-44%
-43%
-42%
-41%
-40%
-39%
-38%
-37%
-36%
-35%
-34%
-33%
-32%
-31%
-30%
-29%
-28%
-27%
-26%
-25%
-24%
-23%
-22%
-21%
-20%
-19%
-18%
-17%
-16%
-15%
-14%
-13%
-12%
-11%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%

27,513,349.95
27,002,743.48
26,487,603.31
25,969,387.76
25,449,369.04
24,928,656.36
24,408,216.03
23,888,888.89
23,371,405.54
22,856,399.58
22,344,419.25
21,835,937.50
21,331,360.95
20,831,037.65
20,335,263.98
19,844,290.66
19,358,328.08
18,877,551.02
18,402,102.76
17,932,098.77
17,467,629.95
17,008,765.52
16,555,555.56
16,108,033.24
15,666,216.90
15,230,111.77
14,799,711.58
14,375,000.00
13,955,951.84
13,542,534.21
13,134,707.50
12,732,426.30
12,335,640.14
11,944,294.21
11,558,330.03
11,177,685.95
10,802,297.69
10,432,098.77
10,067,020.89
9,706,994.33
9,351,948.20
9,001,810.77
8,656,509.70
8,315,972.22
7,980,125.41
7,648,896.29
7,322,212.02

0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
44%
45%
46%

7,000,000.00
6,682,188.02
6,368,704.34
6,059,477.80
5,754,437.87
5,453,514.74
5,156,639.37
4,863,743.56
4,574,759.95
4,289,622.09
4,008,264.46
3,730,622.51
3,456,632.65
3,186,232.28
2,919,359.80
2,655,954.63
2,395,957.19
2,139,308.93
1,885,952.31
1,635,830.80
1,388,888.89
1,145,072.06
904,326.79
666,600.57
431,841.83
200,000.00
-28,974.55
-255,130.51
-478,515.63
-699,176.73
-917,159.76
-1,132,509.76
-1,345,270.89
-1,555,486.46
-1,763,198.93
-1,968,449.93
-2,171,280.28
-2,371,729.98
-2,569,838.27
-2,765,643.60
-2,959,183.67
-3,150,495.45
-3,339,615.16
-3,526,578.32
-3,711,419.75
-3,894,173.60
-4,074,873.33

47%
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
71%
72%
73%
74%
75%
76%
77%

-4,253,551.76
-4,430,241.05
-4,604,972.75
-4,777,777.78
-4,948,686.46
-5,117,728.53
-5,284,933.15
-5,450,328.89
-5,613,943.81
-5,775,805.39
-5,935,940.61
-6,094,375.90
-6,251,137.22
-6,406,250.00
-6,559,739.21
-6,711,629.32
-6,861,944.37
-7,010,707.91
-7,157,943.07
-7,303,672.52
-7,447,918.53
-7,590,702.95
-7,732,047.20
-7,871,972.32
-8,010,498.96
-8,147,647.38
-8,283,437.47
-8,417,888.76
-8,551,020.41
-8,682,851.24
-8,813,399.73

40%

60%

80%

100%

164669741.xls.ms_office - HW 15

Mutually Exclusive Projects

A

Year
0
1
2
3
4
RRR
IRR
NPV
PI

(415,000.00)
49,000.00
57,000.00
74,000.00
530,000.00

(35,000.00)
19,400.00
14,300.00
13,600.00
10,400.00

13.00%

13.00%

Pay Back
A
1
2
3
4
Year Paid Back

B
366,000.00
309,000.00
235,000.00
(295,000.00)

15,600.00
1,300.00
(12,300.00)
(22,700.00)

164669741.xls.ms_office - HW 15 (an)

Mutually Exclusive Projects

A

Year
0
1
2
3
4
RRR
IRR
NPV
PI

(415,000.00)
49,000.00
57,000.00
74,000.00
530,000.00

(35,000.00)
19,400.00
14,300.00
13,600.00
10,400.00

13.00%
16.80%
49,346.83
1.1189

13.00%
26.59%
9,171.14
1.2620
Pay Back
A
1
2
3
4
Year Paid Back

B
366,000.00
309,000.00
235,000.00
(295,000.00)
3.44

15,600.00
1,300.00
(12,300.00)
(22,700.00)
2.10

We select A because the NPV = $49,346.83,

and we do this even though the other decision
tools would lead us to the opposite conclusion.
Why? Because the NPV rule shows us the
value added for shareholders, incorporates the
time value of money concept and included
risks in RRR (discount) rate.

Because the NPV rule shows us the value added for

shareholders, incorporates the time value of money
concept and included risks in RRR (discount) rate.

164669741.xls.ms_office - HW(20)
CF0
CF1
CF2
CF3
CF4
IRR = Indifference Rate =

-561,382.00
190,584.00
234,318.00
182,674.00
150,313.00
1%
Discount Rate NPV
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%

164669741.xls.ms_office - HW(20)
36%
37%
38%
100%
200%
300%
400%
500%
1000%
4000%
5000%
6000%
7000%
8000%
9000%
############

164669741.xls.ms_office - HW(20 an)

CF0
CF1
CF2
CF3
CF4
IRR = Indifference Rate =

-561,382.00
190,584.00
234,318.00
182,674.00
150,313.00
13.85%

Sum of Cash Flows

196,507.00
1%
Discount Rate NPV
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
100%
200%
300%
400%
500%

196,507.00
178,765.46
161,687.97
145,241.94
129,396.71
114,123.45
99,395.00
85,185.77
71,471.64
58,229.84
45,438.90
33,078.53
21,129.53
9,573.79
-1,605.85
-12,425.64
-22,900.97
-33,046.41
-42,875.79
-52,402.21
-61,638.14
-70,595.38
-79,285.17
-87,718.18
-95,904.57
-103,853.99
-111,575.63
-119,078.25
-126,370.19
-133,459.39
-140,353.44
-147,059.57
-153,584.67
-159,935.34
-166,117.86
-172,138.25
-178,002.24
-183,715.34
-189,282.81
-375,281.69
-463,197.25
-495,649.68
-512,190.59
-522,147.47

If the discount rate is 0%, the NPV is the sum

If the discount rate is infinite%, the NPV is the
As the rate gets larger, the NPV is the cost (F

Discount Rate
0%
13.85%
9000%

1.20
300,000.00
200,000.00
1.00
100,000.00
0.80 0.00
0%
-100,000.00
0.60

2000%

-200,000.00
0.40
-300,000.00
0.20
-400,000.00
-500,000.00
0.00
0%
-600,000.00

2000%

164669741.xls.ms_office - HW(20 an)

1000%
4000%
5000%
6000%
7000%
8000%
9000%
############

-541,972.16
-556,591.51
-557,553.57
-558,193.88
-558,650.72
-558,993.05
-559,259.13
-561,382.00

164669741.xls.ms_office - HW(20 an)

unt rate is 0%, the NPV is the sum of all the cash flows
unt rate is infinite%, the NPV is the cost (all the cash flows discounted back at such a high rate would zero).
gets larger, the NPV is the cost (Future Cash Flows are zero because rate so high).

NPV
196,507.00
0.00
-559,259.13

2000%

2000%

4000%

4000%

6000%

6000%

8000%

8000%

10000%

10000%

164669741.xls.ms_office - HW(21)
Mutually Exclusive Projects
F

Year
0
1
2
3
4
5

(195,000.00)
45,000.00
60,000.00
85,000.00
115,000.00
130,000.00
RRR
IRR
PI

NPV
1
2
3
4
5
Payback

(125,000.00)
65,000.00
45,000.00
55,000.00
50,000.00
45,000.00

10.00%
32.76%
1.5976

164669741.xls.ms_office - HW(21)

10.00%
27.57%
1.6083

164669741.xls.ms_office - HW(21an)
Mutually Exclusive Projects
F

Year
0
1
2
3
4
5
NPV
1
2
3
4
5
Payback

(125,000.00)
65,000.00
45,000.00
55,000.00
50,000.00
45,000.00

(195,000.00)
45,000.00
60,000.00
85,000.00
115,000.00
130,000.00

74,695.44

118,623.95

60,000.00
15,000.00
(40,000.00)
(90,000.00)
(135,000.00)
2.2727

150,000.00
90,000.00
5,000.00
(110,000.00)
(240,000.00)
3.04

I would take project G because both projects have better results

from our analysis (even though project G goes a bit beyond the
payback rule cut off of three years..

RRR
IRR
PI

10.00%
32.76%
1.5976

164669741.xls.ms_office - HW(21an)

10.00%
27.57%
1.6083