W8_Hassan Albarrami_ (NPV)
- Problem Definition
NPV is a powerful technique which used to know how much the money in future worth today. For instant $10000 today does not equal the same amount after 3 years, in fact it worth more in future and this because of investment and interest rate along that period. The figure below illustrates the idea.
Figure 1 Present value and Future value
I have taken 130000 OMR loan (invested in construction building) from the bank with interest rate of 0.5 % for 25 years. In this blog NPV will be used to find out the visibility of this project.
- Identify the Feasible Alternative
Either to go ahead with the project (the project is visible) or to cancel the project (the project is not visible).
- Selection Criteria
NPV >0 accept the project
NPV<0 reject the project
- Analysis and Comparison of the Alternative
The above equation  is the one we used to calculate Present Value (PV) where :
PV: Present Value
FV: Future Value
i: interest rate
n : number of periods
The table below shows the inflow and out flow of the cash along the period of 25 years
Table 1 project cash flow
Where out flow is the yearly installment paid to the bank, inflow is the money gained from renting the building.
- Selection of the Preferred Alternative
It is clear from the table that NPV= 151093.4606 OMR which mean the project is acceptable
- Performance Monitoring and the Post Evaluation of Result
As the inflow calculations are estimated here it is recommended Using Delphi Technique with P (90) to estimate the expected rent income.
- Investopedia , Understanding The Time Value Of Money, Retrieved on 27.07.2014 from http://www.investopedia.com/articles/03/082703.asp
- ehow, How to Calculate NPV and IRR , Retrieved on 27.07.2014 from http://www.ehow.com/how_6746269_calculate-npv-irr.html
- Businessdictionary, net present value (NPV), Retrieved on 27.07.2014 from http://www.businessdictionary.com/definition/expected-monetary-value.html