View
20.276
Download
16
Tags:
Embed Size (px)
DESCRIPTION
This is a slide pack that explains the concept of NPV for new project managers.
Citation preview
Net Present Value
Net Present ValueFor new project managers
Net present value can be tricky to learn, but its really very simple.
In this presentation I try to deliver an explanation of what it is
And how to use it.
Your feedback to this slide pack would be appreciated
Lets get on with it
What is Net Present Value?
What is Net Present Value?
What is Net Present Value?Net Present Value
Net Present ValueNet present value (NPV) is a standard method for the financial appraisal of long-term projects.
Net Present ValuePresent value of net cash flows
What is it?Net Present ValueCash flow is discounted back to its present value (PV).
20092008201020112012In todays termsIn todays termsIn todays termsIn todays termsRevenues Costs = ?
Simple, right?
What is it?But what is it?
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
20092008201020112012In todays termsIn todays termsIn todays termsIn todays termsRevenues Costs = ?
Each cash inflow/outflow is discounted back to its present value (PV).
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
Each cash inflow/outflow is discounted back to its present value (PV).
Then they are summed.
20092008201020112012In todays termsIn todays termsIn todays termsIn todays termsRevenues Costs = ?
Got it yet?
Each cash inflow/outflow is discounted back to its present value (PV).
Year 1s value in todays terms,Year 2s value in todays terms,Year 3s value in todays terms,Year 4s value in todays terms,etc
2. Then they are summed.
Year 1 +Year 2 +Year 3 +Year 4 +Etc------------= Sum
But what is the formula all about?
t - the time of the cash flow N - the total time of the project r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) Ct - the net cash flow (the amount of cash) at time t (for educational purposes, C0 is commonly placed to the left of the sum to emphasize its role as the initial investment.)
What is it?t
the time of the cash flow
What is it?N
the total time of the project
What is it?
r
the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)
What is it?
Ct
the net cash flow (the amount of cash) at time t (for educational purposes, C0 is commonly placed to the left of the sum to emphasize its role as the initial investment.)
The value of money over time
The discount rate10%
Y1Y2Y3Y491%83%75%68%
The discount rate10%
Y1Y2Y3Y491%83%75%68%Why not
Y1Y2Y3Y491%83%75%68%
The discount rateBecause your 10% discount rate is worked out backwards.
Last year was 10% greater than this yearWhy not
Y1Y2Y3Y491%83%75%68%
The discount rate10%
Y1Y2Y3Y491%83%75%68%
So it looks like this
Excel can help
NPV in excelHelp menuNPV
But it aint perfectThe NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below
The calculations in excel are The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below different
NPV in excelThe NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below
NPV in excel
NPV in worksheets
Financial Analysis
for e-Learning Project 2006
Discount rate
YEARS:
1
2
3
4
Total
Costs
Discount factor
0.91
0.83
0.75
0.68
Discounted costs
Benefits
Discount factor
0.91
0.83
0.75
0.68
Discounted benefits
Discounted benefits - costs
NPV
Cumulative benefits - costs
ROI
Payback In Year:
When is it used?
Assessing the value of a project
NPV is typically used for 2 reasons
2. Choosing which projects get priority
When is NPV used?
Assessing the value of a project
NPV is typically used for 2 reasons
2. Choosing which projects get priority
Assessing the value of a project
NPV is typically used for 2 reasons
2. Choosing which projects get priority
Assessing the value of a project
NPV is typically used for 2 reasons
2. Choosing which projects get priority
When do you use it?Project 1Project 2Compare & ContrastWhich one is best?Costs & BenefitsIs it worth our investment?
Which is the better investment?http://www.flickr.com/photos/makz/56920649/http://www.flickr.com/photos/f2g2/75152105/
Which was the better investment?http://www.flickr.com/photos/orangebrompton/1858900270/http://www.flickr.com/photos/orangebrompton/1858900270/
Questions
What is the discount rate?What is IRR?
What is IRR?Internal Rate of Return
What is IRR?The amount you need to earn to make it all worthwhile
What is IRR?It is based on things like opportunity cost, the cost of money and risk
< 0 < NPV < 0 NPV = 0 NPV > 0The investments return is less than the discounted cash thresholdThe investments return meets the discounted cash thresholdThe investments return exceeds the discounted cash threshold< 0= 0> 0
What is NPV good for?
When does a project manager use NPV?
What project documents (or artefacts) would you find NPV calculations in?
How does NPV help in decision making?
When is NPV not so useful?
What impact does (would) NPV have on your project?
AnswersWhat is NPV good for?
When does a project manager use NPV?What project documents (or artefacts) would you find NPV calculations in?How does NPV help in decision making?When is NPV not so useful?
What impact does (would) NPV have on your project?Understanding the future value of money in todays termsIn presenting the cost-benefit analysis, or justification for a projectBusiness cases, project plans, and project portfolio reports
It helps compare the value of different projects against investment targetsIf a project and its benefits are only going to run for a short period (e.g. less than a year) or if a projects benefits are non financial Reflect on your projects costs and forecast benefits
Another exampleEstimated costs; $1,750,000 in year 1 and $400,000 each year in years 2, 3 and 4.Estimated benefits; $0 in year 1, and $950,000 each year in years 2, 3, and 4. Use a 10 percent discount rate.
Financial Analysis
for e-Learning Project 2006
Discount rate
10%
YEARS:
1
2
3
4
Total
Costs
Discount factor
0.91
0.83
0.75
0.68
Discounted costs
Benefits
Discount factor
0.91
0.83
0.75
0.68
Discounted benefits
Discounted benefits - costs
NPV
Cumulative benefits - costs
ROI
Payback In Year:
Another exampleEstimated costs; $2,500,000 in year 1 and $250,000 each year in years 2, 3 and 4.Estimated benefits; $0 in year 1, and $750,000 each year in years 2, 3, and 4. Use a 10 percent discount rate.
Financial Analysis
for e-Learning Project 2006
Discount rate
YEARS:
1
2
3
4
Total
Costs
Discount factor
0.91
0.83
0.75
0.68
Discounted costs
Benefits
Discount factor
0.91
0.83
0.75
0.68
Discounted benefits
Discounted benefits - costs
NPV
Cumulative benefits - costs
ROI
Payback In Year:
Craig Brownwww.BetterProjects.net
One last request
If you are a Presentation ZENthusiast Id love to see your efforts to improve this pack.