Compare the Npv of Eight Projects

In: Business and Management

Submitted By xufengdi
Words 645
Pages 3
Other than simply inspecting the cash flows, NPV method, IRR method, Payback period method and PI method are three most popularly used quantitative methods to do capital-budgeting analysis. Among the three methods, NPV is better than the other two methods in most situations.

1. Definition

2. Calculation results under different methods
Using the mentioned 4 methods and Excel, the following calculating result can be achieved.

Project | 1 | 2 | 3 | 4 | 5 | NPV | 73.09 | -85.45 | 793.92 | 228.22 | 129.70 | IRR | 10.87% | 6.31% | 11.33% | 0.1233 | 11.12% | Payback Period | 7 | 2 | 15 | 6 | 8 | Discounted Payback Period | 8 | 3 | 15 | 10 | 14 | PI | 1.04 | 0.97 | 1.20 | 1.11 | 1.06 |

Project | 6 | 7 | 8 | Incremental index for 7-8 | NPV | 0.00 | 165.04 | 182.98 | -17.94 | IRR | 10.00% | 15.26% | 11.41% | 10.18% | Payback Period | 1 | 2 | 7 | - | Discounted Payback Period | 1 | 3 | 7 | - | PI | 1.00 | 1.08 | 1.09 | -0.01 |

Consider that Project 7 and 8 are mutually exclusive, by calculating the incremental NPV, IRR and PI index, and we can find that project 8 should be chosen over project 7 in all the 3 methods. Thus, the ranking results under different methods can be achieved:

NPV | 3 | 4 | 8 | 5 | IRR | 4 | 8 | 3 | 5 | Payback Period | 6 | 2 | 7 | 1 | Discounted Payback Period | 6 | 2 | 7 | 1 | PI | 3 | 4 | 8 | 5 |

In payback and discounted payback period methods, project 2 and project 7 actually have the same ranking. NPV and PI methods have the same ranking results, and payback period and discounted period method have basically the same ranking results.

3. Results analysis
The three methods all have their advantages as well as disadvantages, and they can result on different ranking of the projects.

1) Pros and cons of the 4 methods a) NPV rule
NPV rule uses all the cash flows, and it is additive.…...

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