W7_Murtadha_Investment Decision (NPV)


  1. Problem Recognition

Net present value (NPV) in Excel 2010 will be used to analyze an investment decision and give the investor a a quick ball park figures on whether or not to go ahead with a certain project Typically, if an investment has a positive net present value, it will add value to the investor.

  1. 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 make a loss therefore should 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 will make a profit and therefore value of the company will increase.

  1. Development of the Outcome for Alternative

Management decided to invest 500,000 OMR. There are two options: the first option has a return on investment with 10,000 OMR per month. Second option has return of investment with 9600 OMR per month. Both investments have same interest rate of 4%.

  1. Selection of Criteria

The investment with higher positive NPV will be selected.

  1. Analysis and Comparison of the Alternative

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

npv

Table-1 investment details

  1. Selection of the Preferred Alternative

From Table-1 it can be seen the Project B provides a positive NPV within 4 years only whereas the Project A requires 5 years Investment in project B would make more sense for the investor.

  1. 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.

  1. References:
  2. Net Present Value Rule, retrieved on August 5, 2014 http://www.investinganswers.com/financial-dictionary/investing/net-present-value-rule-2944
  3. How to Calculate Net Present Value (Npv) in Excel, retrieved on August 5, 2014 http://youtube.com/watch?v=hG68UmupJzs
  4. W8_Hassan Albarrami_ (NPV), retrieved on August 5, 2014 http://pmioman14.com/2014/07/27/w8_hassan-albarrami_-npv/
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One thought on “W7_Murtadha_Investment Decision (NPV)

  1. Murtadha, better go back and review other blog postings from your TEAM…….. WHERE did your 4% come from?

    IF you had taken the time to read over other blog postings, you would KNOW by now that UNTIL you can show us where you got the 4%, using NPV is NOT a valid tool to use…….

    http://pmworldjournal.net/article/using-analytical-hierarchy-process-determine-appropriate-minimum-attractive-rate-return-oil-gas-projects-indonesia/

    Try again and this time, show us where you got the hurdle rate……

    BR,
    Dr. PDG, Jakarta

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