Example 1: Evaluation of Four Independent Projects

The cash flow profiles of four independent projects are shown in the table. Us
determine the acceptability of each of the projects on the basis of the net pre
(NPV) criterion for accepting independent projects.

Cash Flow Profiles of Four Independent Prijects, Php

Independent Projects
n, years
A B
0 -77 -75.3

1 0 28

2 0 28

3 0 28

4 0 28

5 235 28

Solution:
NET PRESENT WORTH

PWF (P/A, i%, n) =

PWF (P/A, 0.2, 5) =

NET PRESENT WOR

Independen
n, years
n, years
A
0 -77.000
1 0.000
2 0.000
3 0.000
4 0.000
5 94.441
NPW = ₱17.44
Remarks ACCEPT

CHOICE A

EQUIVALENT UNIFORM AN

PWF(A/V, i%, n) =

PWF (P/A, 0.2, 5) =

EQUIVALENT UNIFORM ANN

Independen
n, years
A
0 -25.74723715
1 0
2 0
 3 0
4 0
5 31.579230273
EUAW = ₱5.83
Remarks ACCEPT

CHOICE B
ts

s are shown in the table. Using a I = 20%,

on the basis of the net present value
.

dependent Prijects, Php Million

dependent Projects
C D i = 20%
-39.9 18

28 10

28 -40

28 -60

28 30

-80 50

ENT WORTH

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.2 ) 5 -1
=
0.20 ( 1 + 0.2 ) 5

PWF (P/A, 0.2, 5) = 2.9906121399177

NET PRESENT WORTH

Independent Projects
 B C D
-75.300 -39.900 18.000
0.000 0.000 8.333 ₱17.44
0.000 0.000 -27.778 ₱8.44
0.000 0.000 -34.722 ₱0.43
0.000 72.485 14.468 -₱1.61
83.737 -32.150 20.094
₱8.44 ₱0.43 -₱1.61
ACCEPT ACCEPT REJECT

₱17.44 Highest

ALENT UNIFORM ANNUAL WORTH

(1+i)n-1
PWF(A/V, i%, n) =
(1+i)n-1
0.20 ( 1 + 0.2 ) 5
=
( 1 + 0.2 ) 5 -1

PWF (P/A, 0.2, 5) = 0.334379703289615

VALENT UNIFORM ANNUAL WORTH

Independent Projects
B C D
-25.17879166 -39.9 18
28 28 10 ₱5.83
28 28 -40 ₱114.82
 28 28 -60 -₱7.90
28 28 30 ₱8.00
28 -80 50
₱114.82 -₱7.90 ₱8.00
ACCEPT REJECT ACCEPT

₱114.82 Highest
 1
PWF (P/F, i%, n) =
(1+i)n
1
=
( 1 + 0.2 ) 5

PWF (P/F, 0.2, 5) = 0.401877572016461

A
B
C
D

1
PWF (A/F, i%, n) =
(1+i)n
1
=
( 1 + 0.2 ) 5

PWF (A/F, 0.2, 5) = 0.134379703289615

A
B
C
D
 (1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + )0 -1
=
0.00 (1+ ) 0

PWF (P/A, 0.2, 4) = 2.58873456790123

Example 2: Evaluation of Three Alternative Projects

Three alternatives are being considered for improving a street intersection. The ann
that the intersection will last 25 years and the interest rate is 5%. It is assumed that
benefits.

Alternative Total Cost

A ₱10,000,000.00
B ₱12,000,000.00
C ₱19,000,000.00
tive Projects

or improving a street intersection. The annual savings on account of the improvement is shown. Assume
d the interest rate is 5%. It is assumed that each alternative is mutually exclusive but provides similar

Annual Benefits
₱800,000.00 i = 0.05
₱1,000,000.00 n = 25
₱1,400,000.00

SOLUTION :

NET PRESENT WORTH

PWF (P/A, i%, n)

PWF (P/A, 0.05, 25)

Alternative Cost
A ₱10,000,000.00
B ₱12,000,000.00
C ₱19,000,000.00
 CHOICE B

EQUIVALENT UNIFORM ANNUAL WORTH

PWF (P/A, i%, n)

PWF (P/A, 0.05, 25)

Alternative Cost
A ₱709,524.57
B ₱851,429.49
C ₱1,348,096.69

CHOICE B

RATE OF RETURN
Equate:
 Discount Rate=
Economic Life=

Alternative vs Do-Nothing Scenario

A (P/A, i, n)A =
B (P/A, i, n)B =
C (P/A, i, n)C =

CHOICE B
provement is shown. Assume
usive but provides similar

WORTH

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.05 ) 25 -1
=
0.05 ( 1 + 0.05 ) 25

PWF (P/A, 0.05, 25) = 14.0939445660448

Benefits NPW
₱11,275,155.65 ₱1,275,155.65 A

₱14,093,944.57 ₱2,093,944.57 B

₱19,731,522.39 ₱731,522.39 C
 ₱2,093,944.57 Highest

ANNUAL WORTH

i(1+i)n
PWF (P/A, i%, n) =
(1+i)n-1
0.05 ( 1 + 0.05 ) 25
=
( 1 + 0.05 ) 25 -1

PWF (P/A, 0.05, 25) = 0.0709524572992296

Benefits EUAW
₱800,000.00 ₱90,475.43 A

₱1,000,000.00 ₱148,570.51 B

₱1,400,000.00 ₱51,903.31 C

₱148,570.51 Highest

ETURN
NPW = 0
 5%
25 years

Do-Nothing Scenario
12.500 (P/A)A = 12.50020432 iA = 6.237%
12.000 (P/A)B = 12.00002906 iB = 6.678%
13.571 (P/A)C = 13.57099481 iC = 5.381%

6.678% Highest
Feasible A

Feasible B

Feasible C
Example 2: Evaluation of Three Alternative Projects

The Davao City Engineer’s Office (CEO) is planning to pave an existing unpave
District. The CEO has selected two options for comparison. Which option is m
repaid within 40 years, with interest at 5%? Salvage value can be ignored. Du
expected to be less than the average traffic volume during the remaining 30

Alternative Project
Expenditures
PCCP

Initial Investment ₱ 28,000,000.00

Additional ₱ -
Investment

Maintenance,
Operation Expenses ₱ 100,000.00
(MOE) per year

Improvement and/or
Rehabilitation ₱ -

Interest rate, % 0.05

Useful Life, n 40

SOLUTION :
 NET PRESENT WORTH

Alternative Project
Expenditures
PCCP

Initial Investment ₱ 28,000,000.00

Additional
Investment ₱ -

Maintenance,
Operation Expenses ₱ 1,715,908.64
(MOE) per year

Improvement and/or
₱ -
Rehabilitation

NPW ₱ 29,715,908.64

Difference -₱3,099,908.35

CHOICE PCCP

NET PRESENT WORTH

Alternative Project
Expenditures
 Expenditures
PCCP

Initial Investment ₱ 28,000,000.00

Additional
Investment ₱ -

Maintenance,
Operation Expenses ₱ 1,715,908.64
(MOE) per year

Improvement and/or ₱ -
Rehabilitation

NPW ₱ 29,715,908.64

Difference -₱3,099,908.35

CHOICE ₱0.00
 rojects

planning to pave an existing unpaved farm to market road in a remote area of Calinan
s for comparison. Which option is most likely advantageous to the city. If all costs are to be
%? Salvage value can be ignored. During the first 10 years, the average traffic volume is
ffic volume during the remaining 30 years. The costs are shown in the table

Alternative Project
Asphaltic Concrete

₱ 14,000,000.00

₱ 2,000,000.00
After (yrs) 10

₱ 250,000.00

₱ 500,000.00
First (yrs) 10
₱ 1,000,000.00
Next (yrs) 30
0.05
40
RTH

Alternative Project PCCP

Asphaltic Concrete

₱ 14,000,000.00 PWF (P/A, i%, n) =

₱ 1,227,826.51 =

PWF (P/A, 0.05, 40) =

₱ 4,289,771.59

₱ 3,860,867.46

₱ 9,437,351.42
Asphaltic Conc
₱ 29,715,908.64 PCCP
₱ 32,815,816.98
₱ 32,815,816.98
PWF (P/F, i%, n) =
-₱3,099,908.35

₱29,715,908.64 =

PWF (P/F, 0.05, 10) =

RTH
PWF (P/A, i%, n) =

Alternative Project
=
 =
Asphaltic Concrete

₱ 14,000,000.00 PWF (P/A, 0.05, 40) =

₱ 1,227,826.51
PWF (P/A, i%, n) =

₱ 4,289,771.59
=

₱ 3,860,867.46 PWF (P/A, 0.05, 10) =

₱ 9,437,351.42
PWF (P/A, i%, n) =
₱ 29,715,908.64
₱ 32,815,816.98
₱ 32,815,816.98
=
-₱3,099,908.35

₱29,715,908.64 PWF (P/A, 0.05, 30) =

 PCCP

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.05 ) 40 -1
=
0.05 ( 1 + 0.05 ) 40

PWF (P/A, 0.05, 40) = 17.1590863539944

Asphaltic Concrete

1
PWF (P/F, i%, n) =
(1+i)n
1
=
( 1 + 0.05 ) 10

PWF (P/F, 0.05, 10) = 0.613913253540759

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.05 ) 40 -1
=
 =
0.05 ( 1 + 0.05 ) 40

PWF (P/A, 0.05, 40) = 17.1590863539944

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.05 ) 10 -1
=
0.05 ( 1 + 0.05 ) 10

PWF (P/A, 0.05, 10) = 7.72173492918481

(1+i)n-1
PWF (P/A, i%, n) =
i(1+i)n
( 1 + 0.05 ) 30 -1
=
0.05 ( 1 + 0.05 ) 30

PWF (P/A, 0.05, 30) = 15.3724510268828