If i pay 50 today and earn 100 after onemonth, did I make profit ? If i pay 50 today and earn 100 after oneyear, did I make profit ? If i pay 50 today and earn 100 after tenyear, did I make profit ?9
Should always take into considerationOpportunity CostThis can be Interest rate Apartment Rental Even your Time has a cost10
Net Present Value Internal Rate of Return Payback Period Discounted Payback Period11
* Required 12End Of Period Net Cash Flow Present Value Factor (12%) Present Value1 -85750 0.97 = 1/1.03 -857502 -14150 0.94 = 1/1.03^2 -133383 18250 0.91 = 1/1.03^3 1670145678Net46341
Pros› Easy to calculate Cons› Can be misleading (Value and not percentage)› Two projects with the same NPV 100,000. Onerequire big initial investment while the otherrequire less initial investment at the beginning13
I Want to know what is the interest rate of investing inthis project as if i am investing my money in a bankSo what it i* ? , the interest rate that will make thepresent value of the money spent equal to zeroEquation => Σ ( V * (1 + i) ^ -t) = 014
Pros› No need to have get organization Interest Rate› Some companies has its own MARR (minimum attractiverate of return) Cons› difficult to calculate› Can be misleading If a project with 45% IRR but its value is small and it requirestying up a critical developer resource While another with 25% IRR value is big and it requires tyingup the same critical developer resource15
* Required 16Quarter Net Cash Flow at End of quarter Running Total1 -10000 -100002 -5000 -150003 12000 -30004 12000 90005 X X6 X X7 X X8 X X
Pros› Calculations are easy› Risk Period Cons› Doesnt Take into consideration Value of themoney› What is the profitability of the project ?17
Same as Payback period method, it justtakes into consideration the value of themoney19
First Project : have bigged NPV but risky (7 quarters)Third Project : has the biggest ROI (IRR) with least risk but lowest NPVSecond Project has teh lowest ROI but can be combined with the Thirdproject so investment is almost same as the first project while risk andROI is moderate.20
Make sure to remember the followingOpportunity Cost Types of Revenues› New Revenue› Incremental Revenue› Retained Revenue› Operational Efficiencies21
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