Net Present Value For new project managers
Net present value can be tricky to learn, but it’s really very simple.
In this presentation I try to deliver an explanation of what it is
And how to use it.
Your feedback to this slide pack would be appreciated
Let’s get on with it…
What is Net Present Value?
What is Net Present Value?
What is Net Present Value? Net Present Value
Net Present Value Net present value  ( NPV ) is a standard method for the financial appraisal of long-term projects.
Net Present Value Present value  of  net cash flows
What is it? Net Present Value Cash flow is discounted back to its  present value  (PV).
2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
<ul><li>Simple, right? </li></ul>
What is it? But what  is  it?
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul><ul><li>Then they are summed.   ...
2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul>
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).   </li></ul><ul><li>Then they are summed.  ...
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul><ul><li>Then they are summed.   ...
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul><ul><li>Then they are summed.   ...
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul><ul><li>Then they are summed.   ...
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV).  </li></ul><ul><li>Then they are summed.   ...
2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
<ul><li>Got it yet? </li></ul>
<ul><li>Each cash inflow/outflow is discounted back to its present value (PV ).   </li></ul><ul><li>Year 1’s value  in tod...
2. Then they are summed.   Year 1 + Year 2 + Year 3 + Year 4 + Etc ------------ = Sum
But what is the formula all about?
<ul><li>t  - the time of the cash flow </li></ul><ul><li>N  - the total time of the project </li></ul><ul><li>r  - the dis...
What  is  it? t   the time of the cash flow
What  is  it? N   the total time of the project
What  is  it? r the discount rate (the rate of return that could be earned on an investment in the financial markets with ...
What  is  it? <ul><li>Ct </li></ul><ul><li>the net cash flow (the amount of cash) at time  t   </li></ul><ul><ul><li>(for ...
<ul><li>The value of money over time </li></ul>
The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul>
The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul>Why not… Y1 Y2 Y3 ...
The discount rate <ul><li>Because your 10% discount rate is worked out backwards. </li></ul><ul><li>Last year was 10% grea...
The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul><ul><li>So it look...
Excel can help
NPV in excel Help menu “ NPV”
But it ain’t perfect <ul><li>The  NPV investment begins  one period before  the date of the value1 cash flow  and ends wit...
The calculations in excel are … <ul><li>The  NPV investment begins one period before the date of the value1 cash flow  and...
NPV in excel <ul><li>The  NPV investment begins one period before the date of the value1 cash flow  and ends with the last...
NPV in excel 
NPV in worksheets
When is it used? <ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul>...
When is NPV used?
<ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosi...
<ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosi...
<ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosi...
When do  you  use it? Project 1 Project 2 Compare & Contrast Which one is best? Costs & Benefits Is it worth our investment?
Which is the better investment? http://www.flickr.com/photos/makz/56920649/ http://www.flickr.com/photos/f2g2/75152105/
Which was the better investment? http://www.flickr.com/photos/orangebrompton/1858900270/ http://www.flickr.com/photos/oran...
Questions
What is the discount rate? What is IRR?
What is IRR? Internal Rate of Return
What is IRR? The amount you need to earn to make it all worthwhile
What is IRR? It is based on things like opportunity cost, the cost of money and risk
< 0 < NPV < 0 NPV = 0 NPV > 0 The investment’s return is less than the discounted cash threshold The investment’s return m...
<ul><li>What is NPV good for? </li></ul>
<ul><li>When does a project manager use NPV? </li></ul>
<ul><li>What project documents (or artefacts) would you find NPV calculations in? </li></ul>
<ul><li>How does NPV help in decision making? </li></ul>
<ul><li>When is NPV not so useful? </li></ul>
<ul><li>What impact does (would) NPV have on your project? </li></ul>
Answers <ul><li>What is NPV good for? </li></ul><ul><li>When does a project manager use NPV? </li></ul><ul><li>What projec...
Another example Estimated costs; $1,750,000 in year 1 and $400,000 each year in years 2, 3 and 4. Estimated benefits; $0 i...
Another example Estimated costs; $2,500,000 in year 1 and $250,000 each year in years 2, 3 and 4. Estimated benefits; $0 i...
<ul><li>Craig Brown </li></ul><ul><li>www.BetterProjects.net </li></ul>
<ul><li>One last request </li></ul><ul><li>If you are a  Presentation   ZEN thusiast  – I’d love to see your efforts to im...
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Net Present Value A

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Net Present Value A

  1. 1. Net Present Value For new project managers
  2. 2. Net present value can be tricky to learn, but it’s really very simple.
  3. 3. In this presentation I try to deliver an explanation of what it is
  4. 4. And how to use it.
  5. 5. Your feedback to this slide pack would be appreciated
  6. 6. Let’s get on with it…
  7. 7. What is Net Present Value?
  8. 8. What is Net Present Value?
  9. 9. What is Net Present Value? Net Present Value
  10. 10. Net Present Value Net present value ( NPV ) is a standard method for the financial appraisal of long-term projects.
  11. 11. Net Present Value Present value of net cash flows
  12. 12. What is it? Net Present Value Cash flow is discounted back to its present value (PV).
  13. 13. 2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
  14. 14. <ul><li>Simple, right? </li></ul>
  15. 15. What is it? But what is it?
  16. 16. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  17. 17. 2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
  18. 18. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul>
  19. 19. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  20. 20. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  21. 21. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  22. 22. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  23. 23. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV). </li></ul><ul><li>Then they are summed. </li></ul>
  24. 24. 2009 2008 2010 2011 2012 In today’s terms In today’s terms In today’s terms In today’s terms Revenues – Costs = ?
  25. 25. <ul><li>Got it yet? </li></ul>
  26. 26. <ul><li>Each cash inflow/outflow is discounted back to its present value (PV ). </li></ul><ul><li>Year 1’s value in today’s terms, </li></ul><ul><li>Year 2’s value in today’s terms, </li></ul><ul><li>Year 3’s value in today’s terms, </li></ul><ul><li>Year 4’s value in today’s terms, </li></ul><ul><li>etc </li></ul>
  27. 27. 2. Then they are summed. Year 1 + Year 2 + Year 3 + Year 4 + Etc ------------ = Sum
  28. 28. But what is the formula all about?
  29. 29. <ul><li>t - the time of the cash flow </li></ul><ul><li>N - the total time of the project </li></ul><ul><li>r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) </li></ul><ul><li>Ct - the net cash flow (the amount of cash) at time t </li></ul><ul><ul><li>(for educational purposes, C 0 is commonly placed to the left of the sum to emphasize its role as the initial investment.) </li></ul></ul>
  30. 30. What is it? t the time of the cash flow
  31. 31. What is it? N the total time of the project
  32. 32. What is it? r the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)
  33. 33. What is it? <ul><li>Ct </li></ul><ul><li>the net cash flow (the amount of cash) at time t </li></ul><ul><ul><li>(for educational purposes, C 0 is commonly placed to the left of the sum to emphasize its role as the initial investment.) </li></ul></ul>
  34. 34. <ul><li>The value of money over time </li></ul>
  35. 35. The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul>
  36. 36. The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul>Why not… Y1 Y2 Y3 Y4 91% 83% 75% 68%
  37. 37. The discount rate <ul><li>Because your 10% discount rate is worked out backwards. </li></ul><ul><li>Last year was 10% greater than this year… </li></ul>Why not… Y1 Y2 Y3 Y4 91% 83% 75% 68%
  38. 38. The discount rate <ul><li>10% </li></ul><ul><li>Y1 Y2 Y3 Y4 </li></ul><ul><li>91% 83% 75% 68% </li></ul><ul><li>So it looks like this </li></ul>
  39. 39. Excel can help
  40. 40. NPV in excel Help menu “ NPV”
  41. 41. But it ain’t perfect <ul><li>The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below </li></ul>
  42. 42. The calculations in excel are … <ul><li>The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below </li></ul>different
  43. 43. NPV in excel <ul><li>The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below </li></ul>
  44. 44. NPV in excel 
  45. 45. NPV in worksheets
  46. 46. When is it used? <ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosing which projects get priority </li></ul>
  47. 47. When is NPV used?
  48. 48. <ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosing which projects get priority </li></ul>
  49. 49. <ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosing which projects get priority </li></ul>
  50. 50. <ul><li>Assessing the value of a project </li></ul><ul><li>NPV is typically used for 2 reasons </li></ul><ul><li>2. Choosing which projects get priority </li></ul>
  51. 51. When do you use it? Project 1 Project 2 Compare & Contrast Which one is best? Costs & Benefits Is it worth our investment?
  52. 52. Which is the better investment? http://www.flickr.com/photos/makz/56920649/ http://www.flickr.com/photos/f2g2/75152105/
  53. 53. Which was the better investment? http://www.flickr.com/photos/orangebrompton/1858900270/ http://www.flickr.com/photos/orangebrompton/1858900270/
  54. 54. Questions
  55. 55. What is the discount rate? What is IRR?
  56. 56. What is IRR? Internal Rate of Return
  57. 57. What is IRR? The amount you need to earn to make it all worthwhile
  58. 58. What is IRR? It is based on things like opportunity cost, the cost of money and risk
  59. 59. < 0 < NPV < 0 NPV = 0 NPV > 0 The investment’s return is less than the discounted cash threshold The investment’s return meets the discounted cash threshold The investment’s return exceeds the discounted cash threshold < 0 = 0 > 0
  60. 60. <ul><li>What is NPV good for? </li></ul>
  61. 61. <ul><li>When does a project manager use NPV? </li></ul>
  62. 62. <ul><li>What project documents (or artefacts) would you find NPV calculations in? </li></ul>
  63. 63. <ul><li>How does NPV help in decision making? </li></ul>
  64. 64. <ul><li>When is NPV not so useful? </li></ul>
  65. 65. <ul><li>What impact does (would) NPV have on your project? </li></ul>
  66. 66. Answers <ul><li>What is NPV good for? </li></ul><ul><li>When does a project manager use NPV? </li></ul><ul><li>What project documents (or artefacts) would you find NPV calculations in? </li></ul><ul><li>How does NPV help in decision making? </li></ul><ul><li>When is NPV not so useful? </li></ul><ul><li>What impact does (would) NPV have on your project? </li></ul><ul><li>Understanding the future value of money in today’s terms </li></ul><ul><li>In presenting the cost-benefit analysis, or justification for a project </li></ul><ul><li>Business cases, project plans, and project portfolio reports </li></ul><ul><li>It helps compare the value of different projects against investment targets </li></ul><ul><li>If a project and it’s benefits are only going to run for a short period (e.g. less than a year) or if a project’s benefits are non financial </li></ul><ul><li>Reflect on your project’s costs and forecast benefits </li></ul>
  67. 67. Another example Estimated costs; $1,750,000 in year 1 and $400,000 each year in years 2, 3 and 4. Estimated benefits; $0 in year 1, and $950,000 each year in years 2, 3, and 4. Use a 10 percent discount rate.
  68. 68. Another example Estimated costs; $2,500,000 in year 1 and $250,000 each year in years 2, 3 and 4. Estimated benefits; $0 in year 1, and $750,000 each year in years 2, 3, and 4. Use a 10 percent discount rate.
  69. 69. <ul><li>Craig Brown </li></ul><ul><li>www.BetterProjects.net </li></ul>
  70. 70. <ul><li>One last request </li></ul><ul><li>If you are a Presentation ZEN thusiast – I’d love to see your efforts to improve this pack. </li></ul>
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