W9 _Said Alamri_ Investment Decision based on NPV


1. Problem Recognition

Net present value (NPV) in Excel 2010 will be used to analyze an investment decision and give company management a clear way to tell if the investment will add value to the company. Typically, if an investment has a positive net present value, it will add value to the company and benefit company shareholders.

2. Development the Feasible Alternative

Using the NPV formula in Excel 2010, the net present value rule decides if project is worth it based on the following criteria: If NPV < 0, the project will lose the company money and therefore may not be considered. If NPV = 0, the project will neither increase nor decrease value of the company and non-monetary benefits may instead be considered before a decision is made. If NPV > 0, the project should be accepted as it will increase profit and therefore value of the company.

Figure-1 NPV acceptable criteria

Figure-1 NPV acceptable criteria

 

3. Development of the Outcome for Alternative

Management decided to invest 60000 OMR. There are two options: the first option has a return on investment with 1500 OMR per month for 10 years. Second option has return of investment with 3000 OMR per month for 5 years. Both investments have same discount rate of 7%.

4. Selection of Criteria

The investment with higher positive NPV will be selected.

5. Analysis and Comparison of the Alternative

The details of both investments are shown in Table-1.  Excel 2010 NPV function was used to calculate Net present Value for the two investments.

Table-1 investment details

Table-1 investment details

6. Selection of the Preferred Alternative

From Table-1 the second option with five years intervals is the best investment in this case study.

7. Performance Monitoring and the Post Evaluation of Result

For the same case study IRR can be calculated to verify if the selected investment option is still valuable.

8. References:

  1. Net Present Value Rule, retrieved on 9 August 2014http://www.investinganswers.com/financial-dictionary/investing/net-present-value-rule-2944
  2. How to Calculate Net Present Value (Npv) in Excel, retrieved on 9 August 2014http://www.youtube.com/watch?v=hG68UmupJzs
  3. W8_Hassan Albarrami_ (NPV), retrieved on 9 August 2014https://pmioman14.wordpress.com/2014/07/27/w8_hassan-albarrami_-npv/

 

 

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2 thoughts on “W9 _Said Alamri_ Investment Decision based on NPV

  1. Pingback: W10 _Said Alamri_ Investment Decision based on NPV (part two: IRR, ERR&MARR Comparison) | PMI-Oman 2014

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