NPV Analysis of Mutually Indepe

Years of Return of Projects 8

(up to 20 years)
Option 1

MARR (Minimum Acceptable Rate of Return) 10 % Option 2

Option 3
Interest Rate 10 % Option 4

Option 5

-200 -100 0 100 2

Investment Options (order the options

Initialin the increasing order
Annualof Initial Inve
Option Investment Annual Disburseme
Number Explanation s Return nt
0 Do Nothing 0 0 0
1 Purchase Machine A 1000 250 50
2 Purchase Machine B 1200 330 60
3 Purchase Machine A&B 2000 500 110
4 Purchase Machine C 2500 600 150
5 Purchase Machine A&C 3300 900 200

NPV Analysis of the Projects

The best option is Option 5 with the largest Net Present Value

Option 1 Option 2 Option 3

PV of Cum. PV of Cum.
Net Cash Cash Cash Net Cash Cash Cash Net Cash
YearPV Factor Flow Flow Flow Flow Flow Flow Flow
0 100% -1,000 -1,000 -1,000 -1,200 -1,200 -1,200 -2,000
1 91% 200 182 -818 270 245 -955 390
2 83% 200 165 -653 270 223 -731 390
3 75% 200 150 -503 270 203 -529 390
4 68% 200 137 -366 270 184 -344 390
5 62% 200 124 -242 270 168 -176 390
6 56% 200 113 -129 270 152 -24 390
7 51% 200 103 -26 270 139 114 390
8 47% 200 93 67 270 126 240 390
8 47% 200 93 160 220 103 343 420
Mutually Independent Projects

NPV

-100 0 100 200 300 400 500 600

rder of Initial Investments

Annual Net Scrap Value NPV of the
Cash Flow at the end Projects
0 0 0
200 200 160 The option can be taken
270 220 343 The option can be taken
390 420 277 The option can be taken
450 0 -99 This option should not be taken.
700 200 528 The option can be taken

Option 3 Option 4 Option 5

PV of Cum. PV of Cum. PV of Cum.
Cash Cash Net Cash Cash Cash Net Cash Cash Cash
Flow Flow Flow Flow Flow Flow Flow Flow
-2,000 -2,000 -2,500 -2,500 -2,500 -3,300 -3,300 -3,300
355 -1,645 450 409 -2,091 700 636 -2,664
322 -1,323 450 372 -1,719 700 579 -2,085
293 -1,030 450 338 -1,381 700 526 -1,559
266 -764 450 307 -1,074 700 478 -1,081
242 -522 450 279 -794 700 435 -646
220 -301 450 254 -540 700 395 -251
200 -101 450 231 -309 700 359 108
182 81 450 210 -99 700 327 434
196 277 0 0 -99 200 93 528
 a
1
2
3
IRR 10
5
C

528
NPV 0 Do Nothing Option 5
Option 1 160 160 Option 1 1
Option 2 343 343 Option 2 1 0
Option 3 277 277 Option 3 1 1
Option 4 -99 -99 Option 4 0 2
Option 5 528 528 Option 5 1 3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
 Calculatıons and Cha

number 4 a
first 1 a <10
second 2 >1 a
third 3 a >2
fourth 5 >3 a
fifth 10 >5

0.14 0.17 0.13 0 0.14 0.31 0.13 0

1 2 3
1 1 1 0 1 1 1 0
1 2 3 4 5 1and2 1and3 1and4
14% 17% 13% 9% 14% 31% 13% 5%
1 1 1 0 1 1 1 0
1 1 1 1 1 1 1 1

1and2 1and3 1and4

-1,000 -1,200 -2,000 -2,500 -3,300 -200 -1,000 -1,500
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 220 420 0 200 20 220 -200
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
Calculatıons and Chart Data

0.14 0 0 0 0.12 0 0 0 0.16 0

4 5 6 7 8 9 10 11 12 13
1 0 0 1 0 1
1and5 2and3 2and4 2and5 3and4 3and5
14% #DIV/0! -2% 12% #DIV/0! 16%
1 0 1 0 1 0 0 0 1 0
1 0 0 1 1 0 0 0 1 0

1and5 2and3 2and4 2and5 3and4 3and5

-2,300 0 -1,300 -2,100 -500 -1,300
500 -25 180 430 60 310
500 -47 180 430 60 310
500 -67 180 430 60 310
500 -86 180 430 60 310
500 -102 180 430 60 310
500 -118 180 430 60 310
500 -131 180 430 60 310
500 -144 180 430 60 310
0 -117 -220 -20 -420 -220
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
 1

1
0 0 0
14 15 16 IRR current best
0 first best 13.70% 1
4and5 best&second 31.31% 2
28% best&third 0.00% 2
0 0 0 best&fourth 12.39% 5
0 0 1 best&fifth ### 5

Inc.IRR MARR
4and5 1 Opt1 13.70% ### 1 1
-800 2 Opt(2-1) 31.31% ### 1 1
250 3 Opt(3-2) 0.00% ### 1 1
250 4 Opt(5-2) 12.39% ### 1 1
250 5 ### 1 1
250 1
250
250
250
250
200
0
0
0
0 0 0
0 1 0
0 2 0
0 3 0
0 4 0
0 5 0
0 6 0
0 7 0
8 0
9 1
10 0
11 0
12 0
13 0
14 0
15 0
16 0
17 0
18 0
19 0
20 0
 IRR Analysis of Mutually Independent P

Options with negative NPV are eliminated from Incremental IRR Analysis.
Also options with IRR smaller than MARR are eliminated.

Minimum Acceptable Rate of Return:

10.00%
0.35

Options to be investigated and their Internal Rates of Returns:

0.3

Options IRR
0.25
1 Purchase Machine A 13.70%
2 Purchase Machine B 16.74% 0.2
3 Purchase Machine A&B 13.15%
5 Purchase Machine A&C 14.08% 0.15

0.1

Incremental IRR Calculations:

0.05
Inc. IRR Current Best
Opt1 13.70% Opt1 0
Opt(2-1) 31.31% Opt2 Opt1 Opt

Opt(3-2) 0.00% Opt2

Opt(5-2) 12.39% Opt5

Incremental IRR Analysis of the Projects

Option 5 is the best option for the investment in Incremental IRR Analysis
Independent Projects

0.35

0.3

0.25
Inc.IRR
0.2 MARR

0.15

0.1

0.05

0
Opt1 Opt(2-1) Opt(3-2) Opt(5-2)
0
1
2
3
4
5
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 INCREMENTAL IRR ANALYSI

0
A = Current Best Option Elminate options with negative NPV
B = Challenger Option and with IRR<MARR
Let N = number of remaining options

1
Set A =1, B = 2

2
B ?=? N+1 ▬▬ no

█
yes
█

A is the best option.

end
AL IRR ANALYSIS

3
▬▬ IRR of (B - A) ▬▬ <MARR ▬▬ B = B+1
return to 2
█
>=MARR
█

A = B and B = B+1
return to 2
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