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Chapter 3:
Economic evaluation and
investment decision methods
Methods include:
focusing on broad needs
categorizing projects
performing financial analyses
using a weighted scoring model
implementing a balanced score card
Department of Treasury and Finance ,Economic Evaluation for Business Cases ,August 2013
NPV
NPV
NCF
NCF nn
((11
ii)) n
n
Where:
(1 i ) n
Formula:
CF 1 CF 2 CF 3
[ ] Initial Investment 0
(1 i )1
(1 i ) 2
(1 i ) 3
Where:
– CF: Cash Flow
– i: Internal Rate of Return (IRR)
NPV N .CF n
(1 i ) n
3000 4000 5000 7000
NPV 16000 ( 1
) ( 2
) ( 3
) ( 4
)
(1.15) (1.15) (1.15) (1.15)
7000 8000
( 5
) ( 6
) 3862
(1.15) (1.15)
Try i = 25 %
Using interpolation a c
b d
X 15 0 3862
25 15 1221 .88 3862
i X 22.59%
Decision Rule :
Accept if the payback period is less than some preset
limit.
2/23/2019 Engineering project management 15
Financial Analysis of Projects
For the previous example: Is the project acceptable in the
case of 5 years longest acceptable Payback (PB) Period?
At n =0 NPV)0 = -16000
3000
NPV 1 16000 ( 1
) 13391 .3
(1.15)
3000 4000
NPV 2 16000 ( 1
) ( 2
) 10366 .7
(1.15) (1.15)
3000 4000 5000
NPV 3 16000 ( 1
) ( 2
) ( 3
) 7079 .12
(1.15) (1.15) (1.15)
3000 4000 5000 7000
NPV 4 16000 ( 1
) ( 2
) ( 3
) ( 4
) 3076 .84
(1.15) (1.15) (1.15) (1.15)
Using interpolation a c
b d
X 4 0 ( 3076 .84 )
54 403 .39 ( 3076 .84 )
n X 4.88 years