Q1 Calculate NPV?

Year Cash Flows

0 -10000 Discount Rate 10%
1 2000
2 2000
3 4000
4 4000
5 5000
Q2

Input area:

Annual cash flows: Project A Project B

Year 0 $ (7,300) $ (4,390)
Year 1 $ 3,940 $ 2,170
Year 2 $ 3,450 $ 2,210
Year 3 $ 2,480 $ 1,730
.

Output area:

Project A IRR

Project B IRR
Q4
Discount Rate 0.10

Year PROJECT A PROJECT B

0 -10000 -10000
1 10000 1000
2 1000 1000
3 1000 12000

NPV
IRR
Q3
Discount R 0.1

Years Project A Project B

0 -100 -400
1 50 170
2 50 170
3 50 170
4 50 170
NPV
IRR
Q5

Input area:

Annual cash inflows: CF

Year 1 $ 5,000
Year 2 5,500
Year 3 6,000
Year 4 7,000

Discount rate 11%

Initial cost $ 16,000

.

Output area:

Discounted payments: DCF

Year 1
Year 2
Year 3
Year 4

Payback period
Q6

Input area:

Project Alpha
Year 0 $ (2,700)
Year 1 $ 1,500
Year 2 $ 1,300
Year 3 $ 1,100

Discount rate 8.5%

Output area:

PI for Alpha

PI for Beta
 Project Beta
$ (4,100)
$ 900
$ 2,600
$ 3,200

.
Q7

Input area:

AnnualBoard
ca Game DVD
Year 0 $ (850) $ (1,700)
Year 1 $ 670 $ 1,300
Year 2 $ 510 $ 750
Year 3 $ 90 $ 350

Required return 10%

Output area:

a. Payback (Board game)

Payback (DVD)
Payback criterion implies accept
because it pays back sooner.

b. NPV (Board game)

NPV (DVD)
NPV criterion implies accept
because it has a higher NPV.

c. IRR (Board game)

IRR (DVD)
IRR decision rule implies accept
because its IRR is greater.
The Investment Detective CASE STUDY HBR
Project Free Cash Flows (in $ Thousands)

Project Number 1 2 3 4 5 6 7

Initial Investment ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)

Year 1 $330 $1,666 $0 $160 280 $2,200 $1,200
2 330 334 0 200 280 900
3 330 165 0 350 280 300
4 330 0 395 280 90
5 330 0 432 280 70
6 330 0 440 280
7 330 0 442 280
8 1,000 0 444 280
9 0 446 280
10 0 448 280
11 0 450 280
12 0 451 280
13 0 451 280
14 0 452 280
15 10,000 (2,000) 280

Sum of Cash Flow Bene $3,310 $2,165 $10,000 $3,561 $4,200 $2,200 $2,560
Excess of Cash Flow
Over Initial Investm $1,310 $165 $8,000 $1,561 $2,200 $200 $560
Total Life of Investment

Net present Value at:

10%
11%
12%
13%
14%
15%
16%

Internal Rate of Return

Profitability Index

Payback (Years)
Average ROI
Equivalent Annuity (Note 3)
Equiv. Annuity (to infinity)
 8

($2,000)
($350)
(60)
60
350
700
1,200
2,250

$4,150

$2,150