- 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.
- 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.
- 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%.
- Selection of Criteria
The investment with higher positive NPV will be selected.
- 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.
Table-1 investment details
- 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.
- 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.
- Net Present Value Rule, retrieved on August 5, 2014 http://www.investinganswers.com/financial-dictionary/investing/net-present-value-rule-2944
- How to Calculate Net Present Value (Npv) in Excel, retrieved on August 5, 2014 http://youtube.com/watch?v=hG68UmupJzs
- W8_Hassan Albarrami_ (NPV), retrieved on August 5, 2014 http://pmioman14.com/2014/07/27/w8_hassan-albarrami_-npv/