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Net Present Value For new project managers

Net Present Value For new project managers

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Net Present Value For new project managers

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  1. Net Present ValueFor new project managers

  2. Net present value can be tricky to learn, but it’s really very simple.

  3. In this presentation I try to deliver an explanation of what it is

  4. And how to use it.

  5. Your feedback to this slide pack would be appreciated

  6. Let’s get on with it…

  7. What is Net Present Value?

  8. What is Net Present Value?

  9. What is Net Present Value? Net Present Value

  10. Net present value (NPV) is a standard method for the financial appraisal of long-term projects. Net Present Value

  11. Present value of net cash flows Net Present Value

  12. What is it? Cash flow is discounted back to its present value (PV). Net Present Value

  13. Revenues – Costs = ? 2008 2009 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms

  14. Simple, right?

  15. What is it? But what is it?

  16. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  17. Revenues – Costs = ? 2008 2009 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms

  18. Each cash inflow/outflow is discounted back to its present value (PV).

  19. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  20. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  21. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  22. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  23. Each cash inflow/outflow is discounted back to its present value (PV). • Then they are summed.

  24. Revenues – Costs = ? 2008 2009 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms

  25. Got it yet?

  26. Each cash inflow/outflow is discounted back to its present value (PV). • Year 1’s value in today’s terms, • Year 2’s value in today’s terms, • Year 3’s value in today’s terms, • Year 4’s value in today’s terms, • etc

  27. 2. Then they are summed. Year 1 + Year 2 + Year 3 + Year 4 + Etc ------------ = Sum

  28. But what is the formula all about?

  29. 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.)

  30. What is it? t the time of the cash flow

  31. What is it? N the total time of the project

  32. 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.)

  33. 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.)

  34. The value of money over time

  35. The discount rate 10% Y1 Y2 Y3 Y4 91% 83% 75% 68%

  36. The discount rate 10% Y1 Y2 Y3 Y4 91% 83% 75% 68% Why not… Y1 Y2 Y3 Y4 91% 83% 75% 68%

  37. The discount rate Because your 10% discount rate is worked out backwards. Last year was 10% greater than this year… Why not… Y1 Y2 Y3 Y4 91% 83% 75% 68%

  38. The discount rate 10% Y1 Y2 Y3 Y4 91% 83% 75% 68% So it looks like this

  39. Excel can help

  40. NPV in excel Help menu “NPV”

  41. But it ain’t perfect 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

  42. The calculations in excel are … different 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

  43. NPV in excel 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

  44. NPV in excel

  45. NPV in worksheets

  46. When is it used? • Assessing the value of a project NPV is typically used for 2 reasons 2. Choosing which projects get priority

  47. When is NPV used?

  48. Assessing the value of a project NPV is typically used for 2 reasons 2. Choosing which projects get priority

  49. Assessing the value of a project NPV is typically used for 2 reasons 2. Choosing which projects get priority

  50. Assessing the value of a project NPV is typically used for 2 reasons 2. Choosing which projects get priority