projectinvestmentsummary-1

7/27/2019 ProjectInvestmentSummary-1

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for

Year 1 Year 2 Year 3 Year 4 Year 5 Total

-475 564 1,008 1,225 2,795 5,117

Year 1 Year 2 Year 3 Year 4 Year 5 Total

NPV

-114 -145 150 154 186 232

42.8%

3.2 Years

Does [Enter project name here] provide a greater return than a safer investment that the company

might typically make with the same money?

INTERNAL RATE OF RETURN

How long will it take for [Enter project name here] to pay back the investment that the company put

into it?

PAYBACK PERIOD

Directions Work

through each of the following sheets: Net Cash Flow, Discounted Cash Flow, Internal Rate of Return, andPayback Period. Then this sheet (Project Investment Summary) will help you value this project as an

invesment for your company.

PROJECT INVESTMENT SUMMARY

[Enter project name here]

How much cash will [Enter project name here] be throwing off annually?(beyond what it consumes)

NET CASH FLOW

What is the current value (Net Present Value) of that cash?

(based on what "cash"/capital currently costs your company and what other opportunities having that cashmight create)

DISCOUNTED CASH FLOW STREAM


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NET PRESENT VALUE

Time (Year) Cash Flow

0 -1001 4752 564

3 10084 12255 2795

Enter a Rate value (0% - 100%): 15%

NET PRESENT VALUE $3,492.29

Defining Net Present Value: Net present value (or NPV) is a standard method used whenplanning long-term investments. Using the NPV method, a potential investment project should be

undertaken if the present value of all cash inflows minus the present value of all cash outflows(which equals the net present value) is greater than zero.

Calculating the Net Present Value: Just how much present value should be discounted from

future value value is determined by:(a) the amount of time between now and future payment, and (b) an interest rate.Most companies and organizations have interest rate guidelines to use for discounting; often theyuse their current cost of capital. The NPV calculation discounts each year's future value and thenadds the discounted values for the entire cash flow stream.

Desired Results: If the NPV is greater than the cost, the project will be profitable for you

(assuming, of course, that your estimated cash flow is reasonably close to reality). If you havemore than one project on the table, you can compute the NPV of both, and choose the one withthe greatest difference between NPV and cost.


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NET CASH FLOW (Full value cash flow in $)

Year 1 Year 2 Year 3 Year 4Cash Inflows / Other Monetary Gains

Cash Inflow Item 1 100 150 200 300Cash Inflow Item 2 400 645 700 900Cash Inflow Item 3 900 999 1,250 1,500Total Cash Inflows 1,400 1,794 2,150 2,700

Cash Outflows / Costs & Expenses

Cash Outflow Item 1 -75 -80 -90 -100Cash Outflow Item 2 -300 -400 -497 -650Cash Outflow Item 3 -1,500 -750 -555 -725Total Cash Outflows -1,875 -1,230 -1,142 -1,475

Cash Flow Summary

Total Inflows 1,400 1,794 2,150 2,700

Total Outflows -1,875 -1,230 -1,142 -1,475

NET CASH FLOW -475 564 1,008 1,225

Defining Net Cash Flow: A basic financial metric in any business case, Net Cash Flow

calculations as it is a reflection of net profit or loss of an investment. The concept of the tcome into play with this tool.

Calculating the Net Cash Flow: Each important cost or benefit impact leads to an expe

otherwise assigned value in cash flow terms. Cash flow statements are easier to understsimple plus/minus convention is followed: All cash inflows are positive numbers (no pare

cash outflows are negative numbers (with parenthesis or minus sign). The total, after adbecomes the net cash flow.

Desired Results: Ideally, your investment is in excellent condition where your total cash

figures.


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Year 5 Total

550 1,3001,200 3,8452,000 6,6493,750 11,794

-55 -400-300 -2,147-600 -4,130-955 -6,677

3,750 11,794

-955 -6,677

2,795 5,117

is at the heart of most ROI

ime value of money does not

cted cash flow result, or is

and and less prone to error if anthesis, no minus signs) and all

ing up all gains and losses,

inflow far outweighs the outflow


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DISCOUNTED CASH FLOW (Incremental cash flow in $)

Year 1 Year 2 Year 3 Year 4

-125 -175 200 225

Discounting at Year End:

DISCOUNTED CASH FLOW STREAM -114 -145 150 154

Discounting at Mid-Year:

DISCOUNTED CASH FLOW STREAM -119 -152 158 161

Enter an Interest Rate for discounting (0 - 100%) 10.0%

Defining Discounted Cash Flow: This is used to reflect the time value of money, allowi

investment by taking into consideration the present value of future dollars. When evaluat

stream, ask yoursefl the following: How much is that future cash flow worth in todays dol

Calculating the Discounted Cash Flow: Widely used in investment finance, real estate

financial management, the discounted cash flow (or DCF) approach describes a methodcompany. The DCF methods determine the present value of future cash flows by discoucost of capital. This is due to opportunity cost and risk over time. The cash flows are disthe investor - say 10%. This rate is used to calculate a discount factor for each year; thediscounted for one year, but the fifth year's cash flow must be discounted for five years,

Desired Results: That return rate may seem low, but it is still positive after all of our dis

investment decision is probably a good one: it produces enough profit to compensate forlittle extra left over. When investors and managers perform DCF analysis, the importantvalue of the decision after discounting all future cash flows at least be positive (more thameans that the investment decision would actually lose money even it appear to generat


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Year 5 Total

300 425

NPV

186 232

NPV

195 243

ng you to examine the return on

ing your discounted cash flow

lars?

development, and corporate

to value a project or an entireting them using the appropriateounted at a rate acceptable tofirst year's cash flows are onlyo it's discounted by much more.

ounting, suggesting that the

opportunity cost and risk with ahing is that the net presentn zero). If it is negative, thate a nominal profit.


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INTERNAL RATE OF RETURN (Incremental cash flow in $)

Year 1 Year 2 Year 3 Year 4 Year 5-125 -175 200 225 300

Enter an Initial Guess for the IRR (0% - 100%) : 10%

INTERNAL RATE OF RETURN 42.8%

u

Defining Internal Rate of Return: The Internal Rate of Return (IRR) looks at the value

money the company is considering investing in the initiative in a simple savings instrume

account. If you can invest the money at 15%, does the initiative provide the same or greperiod?

Calculating the Internal Rate of Return: Spreadsheets and financial calculators find th

trial and error. There is no "clean" analytic solution. Fortunately Excel will do all the trialit where to find the cash flow stream and give it a starting guess for the IRR. The spreadthe guess as the interest rate for an NPV calculation and, if NPV is not zero, tries a differrecalculates NPV. If the result is closer to 0, it changes the interest rate in the same direthe interest rate in the other direction, and recalculates through many iterations until 0 Nhappen quickly, "behind the scenes," and all you see in the spreadsheet cell is the IRR r

Desired Results: The higher the interest rate (that is, the higher the IRR), the more rob

the returns compare to the costs.


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Total425

f investing the same amount of

nt such as a GIC or savings

ter yield over the discussed

e IRR for a cash flow stream by

and error work for you if you tellheet then (very quickly) usesent interest rate andtion again, otherwise it changesV is reached. The iterations

esult.

st the investment and the better


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PAYBACK PERIOD (Incremental cash flow in $)

Year 1 Year 2 Year 3 Year 4 Year 5

Total incremental inflows 300 250 450 225 475Total incremental outflows -450 -500 -100 45 55

Net Incremental Cash Flow -150 -250 350 270 530

Cumulative Incremental Cash Flow -150 -400 -50 220 750

PAYBACK PERIOD 3.2 Years

Desired Results: Other things being equal, the investment or action with the shorter payback i

Defining Payback Period: Simply put, Payback Period is the length of time it will take to recou

exact point at which the revenues (cash inflows) from an initiative equal the costs (cash outflow

Calculating the Payback Period: Payback period is a measure of time, usually given in decim3.2 yrs." (Or decimal months, or weeks). Payback is sometimes viewed as a measure of risk: ththe risk.


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Total

1,700-950

750

370

the better option.

p an investment. It defines the

s).

al years, such as "Payback =e longer the payback, the higher

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