Using Excel for economic comparisons

Interest factor
(P/F,i,n)
(F/P,i,n)
(P/A,i,n)
(A/P,i,n)
(F/A,i,n)
(A/F,i,n)
(P/G,i,n)
(P/Ai,i,n)

Equation
P = F(1 + i)-n
F = P(1 + i)n
P = A[(1+i)n - 1]/[i(1+i)n]
A = P[i(1+i)n]/[(1+i)n - 1]
F = A[(1+i)n - 1]/i
A = Fi/[(1+i)n - 1]
P = G[(1+i)n - in - 1]/[i2(1+i)n]
P = Ai[1-(1+g)n(1+i)-n]/[i-g]

IRR
NPV

None
None

Excel Function
PV(Rate,Nper,,Fv,Type)
FV(Rate,Nper,,Pv,Type)
PV(Rate,Nper,Pmt,,Type)
PMT(Rate,Nper,Pv,,Type)
FV(Rate,Nper,Pmt,,Type)
PMT(Rate,Nper,,Fv,Type)
none
none
IRR(Values, Guess)
NPV(Rate,Values)

Convert future amount into equivalent pr

Convert present amount into equivalent f
Convert annual series into equivalent pre
Convert present amount into equivalent a
Convert annual series into equivalent fut
Convert future amount into equivalent an
Convert arithmetic gradient series into eq
Convert geometric gradient series into eq
Calculates internal rate of return from ca
Calculates present worth of a cash flow,
starting with the first period. Does not inc

Rate = interest rate as a fraction

P = present amount
Nper = number of compounding periods
F = future amount (year n)
Pv = Present amount (Beginning of year 1, end of year zero)
A = annual series (uniform)
Fv = Future amount (end of last compounding period)
G = arithmetic gradient series
Ai = geometric gradient series
Pmt = Annual payment
Type = 1 (payments at beginning of year), 0 or blank (payments at end of year). We leave Type blank.
Values = the array of values for IRR or NPV calculations, in chronological order, with one amount per compounding period.
For IRR, this should include the initial amount (i.e., payment at end of year 0)
For NPV, this should not include the initial amount (i.e., NPV values start with year 1).
Guess = initial guess at IRR
NOTE: The Excel equations are set up for loans. For example, with a mortgage, you get a lot of
cash up front (+), and you pay it back monthly (-). Thus, positive values in the Fv, Pv, and Pmt
arguments return negative answers (and vice versa).
Example 1 - PV, PMT, and FV)
Given initial, annual, and salvage costs, calculate equivalent present, future, and annual amounts
Initial cost
Annual net revenue
Salvage
lifetime
interest
Cash Flow Diagram
End of Year
0
1
2
3
4
5
6
7

-$400,000
$60,000
$60,000
10.00
0.08

Cash Flow
-$400,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000

$
$
$
years
fraction

8
9
10

Present value,
beginning year 1?

Annual cost over 10

years?

Future value, end

year 10?

Present worth by NPV equation =

$60,000
$60,000
$120,000
Initial

Annual

Salvage

-$400,000

$402,605

$27,792

-$400,000

$402,605

$27,792

-$59,612

$60,000

$4,142

-$59,612

$60,000

$4,142

-$863,570

$869,194

$60,000

-$863,570

$869,194

$60,000

30396

e amount into equivalent present amount

ent amount into equivalent future amount
al series into equivalent present amount
ent amount into equivalent annual series
al series into equivalent future amount
e amount into equivalent annual series
metic gradient series into equivalent present amount
metric gradient series into equivalent present amount
ernal rate of return from cashflow
esent worth of a cash flow, one per period
he first period. Does not include any amounts from the end of year zero.

ount (year n)
ries (uniform)
c gradient series
c gradient series

er compounding period.

Total

Comment

$30,396 Typed Equation

$30,396 PV
$4,530

Typed Equation

$4,530

PMT

$65,624 Typed Equation

$65,624 FV

RULES FOR SOME COMMON ECONOMIC EVALUATIONS

Net Present Worth Method (Present Worth Analysis)
1. Make a Cash Flow Table.
2. Convert all cash flows to Present worth.
3. If projects have different lifetimes, adjust them so that they cover the same period. Two ways to do this are:
A. Use the least common multiple of the useful lifetimes of the alternatives. Be sure to include the salvage
value of any equipment or facilities at the end of each lifetime. For example if two alternatives had lifetimes
of 10 and 15 years, you would have to use 30 years. This means that alternatives will pass through 3 and 2
lifetimes, respectively. One must consider salvage costs at ten, twenty, and thirty years, and fifteen and thirty
years for the two alternatives, respectively. One must also consider equipment replacement costs at ten and
twenty years, and fifteen years for the two alternatives, respectively.
B. Use a fixed period for all alternatives, applying the market value of equipment and facilities at the end of
the analysis period. For example, for the alternatives with 10 and 15 year lifetimes, you could analyze each
for 10 years, applying the market value of all equipment and facilities at ten years.
Equivalent Unifrn Annual Cost (Annual Cash Flow Analysis or Annual Worth Analysis)
1. Make a Cash Flow Table.
2. Convert all yearly cash flows into annual worth (over lifetime).
3. Does not matter if projects have different lifetimes.
Internal Rate of Return Analysis
1. Write equation for present worth net benefit that leaves i as a variable. Set equation equal to zero.
2. Determine i* for each alternative by one of the following
A. Solve equation for i* using a math solver program
B. Solve equation for i* by trial and error
C. Solve equation by solving for a number of different i's, plotting i vs present worth net benefit and
identifying i* as interest rate for which present worth net benefit is zero.
3. Discard any alternative for which i* < MARR.
If you want to identify the best alternative using incremental rate of return analysis, continue.
4. Order the remaining alternatives from lowest to highest initial cost.
5. Take the two lowest cost alternatives and calculate the incremental cash flow for the two projects.
Incremental cash flow is simply the difference in cash flow for the two alternatives in each year. Use the
incremental cash flow to calculate the incremental i* (i*). If i* is less than MARR, keep the lower cost project.
If it is greater than MARR, keep the higher cost project. The logic is as follows. If the additional costs and
benefits associated with the higher cost project do not have i* greater than MARR, the additional costs are
not worthwhile.
6. Repeat the previous step with the two (remaining) lowest cost projects. Continue until all alternatives are
evaluated. The last remaining alternative is the one with maximum net benefit.
Benefit Cost Analysis
From Project Summary
1. Convert benefits to present worth benefits (PWB)
2. Convert costs to present worth costs (PWC)
3. The benefit cost ratio is PWB / PWC.
4. You'll get the same answer if you use annual worth or future worth.
From Cash Flow Table (Use this method only if Project Summary is unavailable)
1. Create a cash flow table.

2. Convert all amounts in years with negative net benefit (i.e., where costs were larger than benefits) to present
worth (PWC)
3. Convert all amounts in years with positive net benefit (i.e., where benefits were larger than costs) to present
worth (PWB)
4. The benefit cost ratio is PWB / PWC.
5. You'll get the same answer if you use annual worth or future worth.
If you want to identify the best alternative using the incremental benefit cost ratio method, continue.
6. When comparing two alternative with the same benefit or cost, choose the alternate with the largest benefitcost ratio.
7. If neither benefit or cost is the same, compute the Present worth and present cost for each alternative and
follow the remaining steps.
8. Discard any alternative with PWB / PWC less than 1
9. Oder remaining alternatives from lowest to highest cost and number 1, 2,,P.
10. For projects 1 and 2 compute the incremental PWB / PWC, i.e., (PWB 2-PWB1) / (PWC2-PWC1)
11. If the incremental PWB / PWC ratio is greater than 1, keep project 2. If it is less than 1, keep project 1.
12. Repeat, comparing the next project to the best project identified so far. Keep repeating until only one (the
best) project is left.
Payback Period
Undiscounted
1. Create a cash flow table for the project.
2. Determine the cumulative cash flow for each period.
3. Identify the period (if there is one) during which the cumulative cash flow becomes positive.
Discounted
1. Create a cash flow table for the project.
2. Estimate the present worth of the cash flow for each period.
3. Determine the cumulative present worth cash flow for each period.
4. Identify the period (if there is one) during which the cumulative cash flow becomes positive.
5. Use the equation given above to calculate the exact payback period, if necessary. We won't bother.

Yellow cells indicate incremental methods, beyond the scope of CE Systems.

Yellow cells indicate incremental methods, beyond the scope of CE Systems.

In Class Example problem

The table below gives economic information on three projects
Alternative
Initial Cost, $
O&M, $/yr
Revenue, $/yr
Salvage, $
Lifetime

A
-50000
-4000
10000
15000
9

Interest

B
-25000
-5000
10000
10000
9

C
-70000
-10000
30000
25000
3

Projects
B
-$25,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$15,000

C
-$70,000
$20,000
$20,000
-$25,000
$20,000
$20,000
-$25,000
$20,000
$20,000
$45,000

0.08

(a) Create a cash flow table for each project.

End of
Year
0
1
2
3
4
5
6
7
8
9

A
-$50,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$21,000

Alternate
C
-$70,000
$20,000
$20,000
$45,000

(b) Compare using the net present worth method.

Project A
Project B
Project C

-$50,000
-$25,000
-$70,000
-$45,000

Answer :

+
$6,000
+
$5,000
+
$20,000
(P/F,i,6) +
Project

i = 0.08
x (P/A,i,9) +
$15,000 x (P/F,i,9) =
x (P/A,i,9) +
$10,000 x (P/F,i,9) =
x (P/A,i,9) +
-$45,000 x (P/F,i,3) +
$25,000 x (P/F,i,9) =
$3,364

-$5,015
$11,237

I've documented how to solve the problem by hand,

But solved the problem using the NPV formula.

realizes the greatest net present worth

(c) Compare using the annual cost flow method

Project A
Project B
Project C

-$50,000 x (A/P,i,9) +
-$25,000 x (A/P,i,9) +
-$70,000 x (A/P,i,3) +

Answer :

$6,000
$5,000
$20,000

Project

+
+
+

$15,000 x (A/F,i,9) =
$10,000 x (A/F,i,9) =
$25,000 x (A/F,i,3) =

-$803 I've documented how to solve the problem by hand,

$1,799 But solved the problem using the PMT formula.
$538

realizes the greatest annual net benefit

(d) Determine the internal rate of return for each project using the graphical method, to the nearest integer (as %).

Present Worth
Project A Project B Project C
$19,000
$30,000
$45,000
$15,111
$26,973
$38,110
$11,525
$24,179
$31,800
$8,213
$21,595
$26,014
$5,151
$19,203
$20,702
$2,316
$16,985
$15,819
-$311
$14,927
$11,325
-$2,750
$13,015
$7,184
-$5,015
$11,237
$3,364
-$7,122
$9,581
-$165
-$9,084
$8,036
-$3,428
-$10,914
$6,594
-$6,448
-$12,621
$5,247
-$9,248
-$14,217
$3,987 -$11,846
-$15,709
$2,807 -$14,260
-$17,107
$1,701 -$16,505
-$18,416
$662 -$18,595
-$19,646
-$313 -$20,543
-$20,800
-$1,230 -$22,361
-$21,886
-$2,094 -$24,059
-$22,907
-$2,907 -$25,648

i
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
0.11
0.12
0.13
0.14
0.15
0.16
0.17
0.18
0.19
0.2
i* =

6%

17%

Ne t Pre se nt Worth

Using the formulas from part a, determine the present worth for a number of values of i. Identify the i's that give PW = 0.

$50,000
Project A
Project B

$40,000

Project C

$30,000
$20,000
$10,000
$0
0

0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2

-$10,000
-$20,000
i* is the interest rate that gives zero net PW.

-$30,000

9%

Note: I've used the IRR formula, but the answers can be read off of the Table or Chart.

(e) Compare based on the Benefit Cost Ratio

The benefit Cost ratio = Net Present Worth Benefits / Net Present Worth Costs
From Project Summary
Project
PW
A
$69,973
B
$67,471
C
$97,159
Answer:

PC
B/C ratio
$74,988
0.93
$56,234
1.20
$95,771
1.01

Project

From Cash Flow Table

Project
PW
A
$44,985
B
$36,237
C
$108,964
Answer:

I've taken the Project Summary and converted benefits to present worth benefits
and costs to present worth costs. Do problems this way if you have access to project summary.

Has the highest B/C ratio

PC
B/C ratio
$50,000
0.90
$25,000
1.45
$105,600
1.03

Project

I've taken the Cash Flow table and converted the positive yearly amounts to PW
(present worth), and the negative yearly amounts to PC (present cost).

Has the highest B/C ratio

(f) Identify the payback year, undiscounted

End of
Year
0
1
2
3
4
5
6
7
8
9

A
Csh Flw, $
-$50,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000
$21,000

B
Cum, $ Csh Flw, $
-$50,000 -$25,000
-$44,000
$5,000
-$38,000
$5,000
-$32,000
$5,000
-$26,000
$5,000
-$20,000
$5,000
-$14,000
$5,000
-$8,000
$5,000
-$2,000
$5,000
$19,000
$15,000

C
Cum, $ Csh Flw, $
-$25,000 -$70,000
-$20,000
$20,000
-$15,000
$20,000
-$10,000 -$25,000
-$5,000
$20,000
$0
$20,000
$5,000 -$25,000
$10,000
$20,000
$15,000
$20,000
$30,000
$45,000

Cum, $
-$70,000
-$50,000
-$30,000
-$55,000
-$35,000
-$15,000
-$40,000
-$20,000
$0
$45,000

Answer: Payback is in the first year with a positive cumulative cash amount.
(g) Identify the payback year, discounted
End of
Year
0
1
2
3
4
5
6
7
8
9

Csh Flw, $
-50,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
21,000

A
PW, $
-50,000
5,556
5,144
4,763
4,410
4,083
3,781
3,501
3,242
10,505

Cum, $ Csh Flw, $

-$50,000
-25,000
-$44,444
5,000
-$39,300
5,000
-$34,537
5,000
-$30,127
5,000
-$26,044
5,000
-$22,263
5,000
-$18,762
5,000
-$15,520
5,000
-$5,015
15,000

B
PW, $
-25,000
4,630
4,287
3,969
3,675
3,403
3,151
2,917
2,701
7,504

Cum, $ Csh Flw, $

-$25,000
-70,000
-$20,370
20,000
-$16,084
20,000
-$12,115
-25,000
-$8,439
20,000
-$5,036
20,000
-$1,886
-25,000
$1,032
20,000
$3,733
20,000
$11,237
45,000

Answer: Payback is in the first year with a positive cumulative cash amount.

C
PW, $
-70,000
18,519
17,147
-19,846
14,701
13,612
-15,754
11,670
10,805
22,511

Cum, $
-$70,000
-$51,481
-$34,335
-$54,181
-$39,480
-$25,868
-$41,622
-$29,953
-$19,147
$3,364

More Examples
Example 1
Compare Two Alternatives using Present Worth Analysis and Annual Cash Flow Analysis.
A
Initial Costs
Annual Net Revenue
Lifetime
Salvage (at Lifetime)
Interest

B
-$200,000
$50,000
5
$20,000

-$400,000
$70,000
10
$0
0.08

A
-$200,000
$50,000
$50,000
$50,000
$50,000
-$130,000
$50,000
$50,000
$50,000
$50,000
$70,000

Initial Costs (beginning of year 1)

Cash flow in Year 1 (up until end)
Cash flow in Year 2
Cash flow in Year 3
Cash flow in Year 4
Cash flow in Year 5
Cash flow in Year 6
Cash flow in Year 7
Cash flow in Year 8
Cash flow in Year 9
Cash flow in Year 10

B
-$400,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000

OR

22262.96
22262.96

69705.70 Pick B
69705.70

Equations
PV
NPV

OR

3317.84
3317.84

10388.20 Pick B
10388.20

PMT & PV
PMT & NPV

OR

48064.07
48064.07

150489.37 Pick B
150489.37

Present Value

Annual Worth

Future Value (10 years)

FV & PV
FV & NPV

Example 2
Calculate internal rate of return
A

0.08
10
MARR = Minimum Acceptable Rate of Return

Initial Costs
Annual Net Revenue
Lifetime (years)
Salvage (at Lifetime)

-$200,000
$50,000
5
$20,000

-$400,000
$70,000
10
$0

Initial Costs (beginning of year 1)

Cash flow in Year 1 (up until end)

A
-$200,000
$50,000

B
-$400,000
$70,000

-200
50

Cash flow in Year 2

Cash flow in Year 3
Cash flow in Year 4
Cash flow in Year 5
Cash flow in Year 6
Cash flow in Year 7
Cash flow in Year 8
Cash flow in Year 9
Cash flow in Year 10

$50,000
$50,000
$50,000
-$130,000
$50,000
$50,000
$50,000
$50,000
$70,000

50
50
50
70

$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000

10.4%

Rate of return analysis using IRR command. Assume MARR = 0.08.

A
B
i*
0.1036
0.1173
Both A and B i* > MARR

Note: you'll get the same i* for A based on the 5 year lifetime.
Rate of return analysis by plotting:

PWNB

Calculate net PW of A and B for many interest rates.

Plot and determine interest rate that obtains
zero net present worth. This is i*.

Interest
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
0.11
0.12
0.13
0.14

Net PW
A
$120,407
$102,505
$86,122
$71,109
$57,330
$44,666
$33,009
$22,263
$12,343
$3,173
-$5,316
-$13,186
-$20,493
-$27,286

Net PW
B
$262,991
$228,781
$197,114
$167,763
$140,521
$115,206
$91,651
$69,706
$49,236
$30,120
$12,246
-$4,484
-$20,163
-$34,872

$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
-$50,000

A
B

$150,000
$100,000
$50,000
$0
-$50,0000.01

0.03

0.05

0.07

0.09

0.11

0.13

Interest Rate
i* is where each plot has PWNB = 0.
Rate of return analysis using Solver (Excel Add-in)
Set Target Cell (Present Worth)
By Changing Cell (i*)

$0.0000
0.1036

$0
0.1173

1. Install Solver Add-in

2. Open Solver (Data/Solver)
3. Set "Set Target Cell" & "By Changing Cells" as indicated above, for desired project.
4. Make "Equal to" option "Value of" 0
5. Select "Solve" and "OK"
Example 3
Compare Two Alternatives using Benefit Cost Analysis.
A
-$200,000
$50,000
5
$20,000

Initial Costs
Annual Net Revenue
Lifetime (years)
Salvage (at Lifetime)
Interest

Present Worth Benefits

Present Worth Costs
B-C Ratio

B
-$400,000
$70,000
10
$0
0.08

A
$358,380

B
$469,706

$336,117

$400,000

1.07
1.17
Keep costs and benefits separate.

Note: You'll get the same ratio for Annual worth or future worth calculations

Example 4
Payback Period Analysis - undiscounted.
A
Initial Costs

B
-$200,000

-$400,000

Alternate Calculations
A
$310,739
$288,476

1.08
Identify Costs and Benefits by yea

Annual Net Revenue

Lifetime
Salvage (at Lifetime)
Interest

Initial Costs (beginning of year 1)

Cash flow in Year 1 (up until end)
Cash flow in Year 2
Cash flow in Year 3
Cash flow in Year 4
Cash flow in Year 5
Cash flow in Year 6
Cash flow in Year 7
Cash flow in Year 8
Cash flow in Year 9
Cash flow in Year 10

$50,000
5
$20,000

$70,000
10
$0
0.08

A
-$200,000
$50,000
$50,000
$50,000
$50,000
$70,000

B
-$400,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000

Cumulative Cash Flow

A
B
-$200,000
-$400,000
-$150,000
-$330,000
-$100,000
-$260,000
-$50,000
-$190,000
$0
-$120,000
$70,000
-$50,000
$20,000
$90,000
$160,000
$230,000
$300,000

A: Payback occurs at the end of year 4, but then new equipment is purchased and
cum cash flow goes negative again, until year 8.
B: Payback occurs during year 6

Example 5
Payback Period Analysis - Discounted.
A
Initial Costs
Annual Net Revenue
Lifetime
Salvage (at Lifetime)
Interest

Initial Costs (beginning of year 1)

Cash flow in Year 1 (up until end)
Cash flow in Year 2
Cash flow in Year 3
Cash flow in Year 4
Cash flow in Year 5
Cash flow in Year 6
Cash flow in Year 7
Cash flow in Year 8
Cash flow in Year 9
Cash flow in Year 10
A: Payback occurs during year 5
B: Payback occurs during year 8

B
-$200,000
$50,000
5
$20,000

-$400,000
$70,000
10
$0
0.08

A
-$200,000
$50,000
$50,000
$50,000
$50,000
$70,000

B
-$400,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000
$70,000

Present worth Cash flow

A
B
-$200,000
-$400,000
$46,296
$64,815
$42,867
$60,014
$39,692
$55,568
$36,751
$51,452
$47,641
$47,641
$44,112
$40,844
$37,819
$35,017
$32,424

(Bonus Analysis)

MARR
comparison life
cceptable Rate of Return

Incremental internal rate of return.

Year
B - A ($)
0
-$200,000
1
$20,000

2
3
4
5
6
7
8
9
20

$20,000
$20,000
$20,000
$200,000
$20,000
$20,000
$20,000
$20,000
$0

0.13
i* =
Which is higher than MARR, so pick larger project (B).

A
B

0.11

0.13

ternate Calculations
B
$469,706
$400,000

1.17
entify Costs and Benefits by year

Incremental Benefit Cost Analysis (Based on Costs & Benefits by Year method)
B-A
Incremental Present Worth Benefits
$158,967
Incremental Present Worth Costs

$111,524

Incremental B-C Ratio

1.43
Incremental B-C Ratio is greater than 1, select larger project, B.

Cumulative Cash Flow

A
B
year
-$200,000 -$400,000
-$153,704 -$335,185
-$110,837 -$275,171
-$71,145 -$219,603
-$34,394 -$168,151
$13,247 -$120,510
-$76,398
-$35,554
$2,265
$37,282
$69,706

1
2
3
4
5
6
7
8
9
10

Year method)