The document provides guidance for completing a Net Present Value (NPV) analysis of a project through six steps: 1) describing the project, 2) estimating investment and cash flows, 3) calculating NPV manually or in Excel, 4) analyzing if the project is financially justified based on NPV, 5) discussing lessons learned, and 6) describing how NPV can improve organizational performance. An example NPV calculation is also provided.
1. Unit 7 – Net Present Value Assignment
Actual or Hypothetical Project Worksheet
PRINT this worksheet to help with the planning of your assignment.
Use the information in the worksheet to write a FORMAL analysis. Do NOT submit this
worksheet for your assignment.
Step #1 - Briefly describe the project:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Step #2 - Estimate the following:
Initial investment ______________
Number of periods (years) ______________
Discount rate: ______________
Future cash flows*
o Year 1 ______________
o Year 2 ______________
o Year 3 ______________
o Year 4 ______________
o Year 5 ______________
*Include as many periods as needed for the project you will analyze in your paper.
2. Step #3 – Calculate the NPV:
Hand calculation - See the example at the end of this worksheet.
Excel calculation – Click here to watch a video that shows how to compute NPV in Excel.
Also see the Excel worksheet provided with the Unit 6 assignment.
NPV = - (initial investment) + + + + +
c
(1+r)t
c
(1+r)t
c
(1+r)t
c
(1+r)t
c
(1+r)t
3. Step #4 – Analyze whether the project is financially justified based on the NPV:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Optional things to think about when working on your analysis:
What is the benchmark for determining if a project is financially justified based on the
NPV?
What sources can you use in your paper to support this benchmark?
How does the project’s NPV compare to the benchmark?
How accurate are the assumptions about the initial investment and future cash flows?
How, if at all, does the NPV influence your perceptions of the project?
How do you think the leaders of your organization would respond if they knew the NPV
of the project?
4. Step #5 – Lessons learned by completing the NPV analysis:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Optional things to think about when working on your analysis:
What did you learn about YOUR ability to complete a NPV calculation?
How did you compute the NPV (by hand, with Excel, or through some other method)?
What did the exercise teach you about time value of money?
5. Step #6 – Describe how an understanding of NPV can be used to improve your organization’s
financial performance:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Optional things to think about when working on your analysis:
What organizations (professional and personal) are you affiliated with that might
benefit from a NPV analysis?
How might each of your organizations use a NPV analysis to evaluate the financial
merits of projects?
How might an organization’s financial performance improve if NPV analyses were
conducted before starting new projects?
6. Example based on Espira (2013)
Click here to watch a video that explains this example.
Initial investment $10,000
Number of periods (years) 5
Discount rate: 6%
Future cash flows*
o Year 1 $2,500
o Year 2 $4,000
o Year 3 $5,000
o Year 4 $3,000
o Year 5 $1,000
Year 1 Year 2 Year 3 Year 4 Year 5
NPV = -10,000 + + + + + +
NPV = -10,000 + + + + + +
NPV = -10,000 + 2358.491 + 3558.719 + 4198.153 + 2377.179 + 747.384
NPV = -10,000 + 13,239.93
NPV = $3,239.93
NOTE: The Espira (2013) video shows dollars only ($3,239).
2500
1.06
4000
1.062
5000
1.063
3000
1.064
1000
1.065
2500
1.06
4000
1.124
5000
1.191
3000
1.262
1000
1.338