Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 29 views

    Kalyani Government Engineering College

    Uploaded by

    Arpan Adak
    This document contains information about present worth analysis, net present value (NPV), and internal rate of return (IRR). It provides examples to illustrate how to calculate NPV and IRR. The NPV example shows how to value a 10-year investment worth $10,000 per year with a discount rate of 10%. The IRR example calculates the rates of return for two potential projects, Project A at 16.61% and Project B at 5.23%, and explains that only Project A should be selected since its IRR exceeds the company's cost of capital of 10%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Kalyani Government Engineering College

    Uploaded by

    Arpan Adak
    29 views4 pages
    This document contains information about present worth analysis, net present value (NPV), and internal rate of return (IRR). It provides examples to illustrate how to calculate NPV and IRR. The NPV example shows how to value a 10-year investment worth $10,000 per year with a discount rate of 10%. The IRR example calculates the rates of return for two potential projects, Project A at 16.61% and Project B at 5.23%, and explains that only Project A should be selected since its IRR exceeds the company's cost of capital of 10%.

    Original Description:

    sda

    Original Title

    10200318062

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document contains information about present worth analysis, net present value (NPV), and internal rate of return (IRR). It provides examples to illustrate how to calculate NPV and IRR. The NPV example shows how to value a 10-year investment worth $10,000 per year with a discount rate of 10%. The IRR example calculates the rates of return for two potential projects, Project A at 16.61% and Project B at 5.23%, and explains that only Project A should be selected since its IRR exceeds the company's cost of capital of 10%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    29 views4 pages

    Kalyani Government Engineering College

    Uploaded by

    Arpan Adak
    This document contains information about present worth analysis, net present value (NPV), and internal rate of return (IRR). It provides examples to illustrate how to calculate NPV and IRR. The NPV example shows how to value a 10-year investment worth $10,000 per year with a discount rate of 10%. The IRR example calculates the rates of return for two potential projects, Project A at 16.61% and Project B at 5.23%, and explains that only Project A should be selected since its IRR exceeds the company's cost of capital of 10%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    KALYANI GOVERNMENT ENGINEERING COLLEGE

    Assignment on
    Economics for Engineers

    Submitted By

    Name: Biswajyoti Paul Department: ECE

    University Roll: 10200318062 Class Roll: 62 Semester: 6th

    Assignment No: 4 Submission Date: 21/07/2021


    Present Worth and Future Worth Analysis

    Present Worth analysis is most frequently used to determine the present value of future money receipts
    and disbursements. We might want to know the present worth of an income producing property, like an oil
    well. This should provide an estimate of the price at which the property could be bought or sold.

    In present-worth analysis, the comparison is made in terms of the equivalent present costs and benefits.
    But the analysis need not be made in terms of the present-it can be made in terms of a past, present, or
    future time. Although the numerical calculations may look different, the decision is unaffected by the
    selected point in time. Often we do want to know what the future situation will be if we take some
    particular course of action now. An analysis based on some future point in time is called Future-Worth
    Analysis.

    Net Present Value (NPV)

    Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of
    an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used
    extensively across finance and accounting for determining the value of a business, investment security,
    capital project, new venture, cost reduction program, and anything that involves cash flow.

    Formula for calculating NPV:

    Where,
    Z1 = Cash flow in time 1
    Z2 = Cash flow in time 2
    r = Discount rate
    X0 = Cash outflow in time 0 (i.e. the purchase price / initial investment)

    Case Study:

    In the table below, the assumption is that an investment will return $10,000 per year over a period of 10
    years, and the discount rate required is 10%.
    The final result is that the value of this investment is worth $61,446 today. It means a rational investor
    would be willing to pay up to $61,466 today to receive $10,000 every year over 10 years. By paying this
    price, the investor would receive an internal rate of return (IRR) of 10%. By paying anything less than
    $61,000, the investor would earn an internal rate of return that’s greater than 10%.

    Internal Rate of Return (IRR)

    The IRR (internal rate of return) is the interest rate (also known as the discount rate) that will bring a
    series of cash flows (positive and negative) to a net present value (NPV) of zero (or to the current value of
    cash invested). Using IRR to obtain net present value is known as the discounted cash flow method of
    financial analysis. Investors and firms use IRR to evaluate whether an investment in a project can be
    justified.

    Case Study:
    Let us assume a company is reviewing two projects. Management must decide whether to move forward
    with one, both, or neither of the projects. Its cost of capital is 10%, The cash flow patterns for each are as
    follows:

    Project A

    ● Initial Outlay = $5,000


    ● Year one = $1,700
    ● Year two = $1,900
    ● Year three = $1,600
    ● Year four = $1,500
    ● Year five = $700

    Project B

    ● Initial Outlay = $2,000


    ● Year one = $400
    ● Year two = $700
    ● Year three = $500
    ● Year four = $400
    ● Year five = $300

    The company must calculate the IRR for each project. Initial outlay (period = 0) will be negative. Solving
    for IRR is an iterative process using the following equation:

    $0 = Σ CFt ÷ (1 + IRR)t

    where:
    ● CF = Net Cash flow
    ● IRR = internal rate of return
    ● t = period (from 0 to last period)

    -or-

    $0 = (initial outlay * -1) + CF1 ÷ (1 + IRR)1 + CF2 ÷ (1 + IRR)2 + ... + CFX ÷ (1 + IRR)X

    Using the above examples, the company can calculate IRR for each project as:

    IRR Project A:

    $0 = (-$5,000) + $1,700 ÷ (1 + IRR)1 + $1,900 ÷ (1 + IRR)2 + $1,600 ÷ (1 + IRR)3 + $1,500 ÷ (1 + IRR)4 +


    $700 ÷ (1 + IRR)5

    IRR Project A = 16.61 %

    IRR Project B:

    $0 = (-$2,000) + $400 ÷ (1 + IRR)1 + $700 ÷ (1 + IRR)2 + $500 ÷ (1 + IRR)3 + $400 ÷ (1 + IRR)4 + $300 ÷
    (1 + IRR)5

    IRR Project B = 5.23 %

    Given that the company's cost of capital is 10%, management should proceed with Project A and reject
    Project B.

    You might also like