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Project Management Notes

This document discusses net present value (NPV) as a method for evaluating investment projects. It provides the NPV formula, lists advantages like considering the time value of money and measuring all cash flows, and notes the difficulty of finding the exact discount rate as a disadvantage. The document also includes two numerical examples, the first calculating the NPV of a project as $112,503.40, and the second presenting cash flows for three projects to calculate their respective NPVs using a 10% discount rate.

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Atiqullah sherzad
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69 views2 pages

Project Management Notes

This document discusses net present value (NPV) as a method for evaluating investment projects. It provides the NPV formula, lists advantages like considering the time value of money and measuring all cash flows, and notes the difficulty of finding the exact discount rate as a disadvantage. The document also includes two numerical examples, the first calculating the NPV of a project as $112,503.40, and the second presenting cash flows for three projects to calculate their respective NPVs using a 10% discount rate.

Uploaded by

Atiqullah sherzad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Net Present Value Lecture # 05

ii. Net Present value:


 NPV of project is equal to present value of expected future net cash flows discounted
with cost of project minus initial cost incurred.

 NPV is the difference between the discounted cash inflows and cash outflows.

Formula:
Ri
NPV =∑ −C o
(1+i)n

Advantages of NPV:
 The advantages of NPV are,

i. NPV includes or considers time value of money.

ii. It measures the access & short falls of the cash flows, i.e. positive results &
negative results.

iii. Measures all cash flows, means that it takes into account all the cash flows till
end of project.

Disadvantages of NPV:
 The disadvantages of NPV are,

i. It is difficult to find exact and correct discount rate. Because of different


reasons.

Numerical 1:
Year Cash Flow Discounting (25%) Present Value

0 (1000,000) (100,000) (1000,000)

1 290,000 =>1/(1+ 0.25)^1= 0.8 $ 232,000

2 320,000 => 1/(1+0.25)^2 = 0.64 $ 204,800

3 353,000 => 1/(1+0.25)^3 = 0.511 $ 180383

4 $389,000 => 1/(1+0.25)^4 = 0.4096 $ 155,720

5 $429,000 => 1/(1+0.25)^5 = 0.32768 $ 137,353

Page 1
6 $779,230 => 1/(1+0.25)^6 = 0.26 $ 202,599

Ri
NPV =∑ −C o
(1+i)n

NPV = 111, 2503.4 – 1,000,000

NPV = 112,503.4

Numerical 2:
Year Project A Project B Project C

0 (5000) (5000) (5000)

1 1100 800 2000

2 1100 900 2000

3 1100 1200 2000

4 1100 1400 100

5 1100 1600 100

6 1100 1300 100

7 1100 1100 100

Discount Rate = 10%

NOTE: Calculate the Net Present Values of the 3 projects.

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