Instructions You may use the software tools available to you

Instructions: You may use the software tools available to you, including Microsoft Excel, Word, PowerPoint, and Project, as needed. Please include your answers and other results in this document in a different color. 1.The following are data for two IT projects for a new database system. Prepare a spreadsheet for two projects, using the following data. Amounts are in thousands of dollars. Calculate the NPV for each. (Please assume a Discount Rate of 10%)

Year 1 Year 2 Year 3 Year 4 Year 5 Total Project 1 Benefits $0 $2,000 $3,000 $4,000 $5,000 tbd Costs $5,000 $1,000 $1,000 $1,000 $1,000 tbd Cashflow ($5,000) $1,000 $2,000 $3,000 $4,000 $5,000 Project 2 Benefits $2,000 $3,000 $5,000 $3,000 $1,000 tbd Costs $2,000 $2,000 $2,000 $2,000 $1,000 tbd Cashflow $0 $1,000 $3,000 $1,000 $0 $5,000

Solution

The NPV of a venture or speculation mirrors how much money inflow, or income, rises to or surpasses the measure of venture capital required to store it. While evaluating numerous tasks, organizations utilize NPV as a method for contrasting their relative benefit with guarantee that exclusive the most lucrative endeavors are sought after. A higher NPV demonstrates that the venture or speculation is more productive.

To figure NPV, the evaluated money surge and inflow for every period must be set up, and in addition the normal rebate rate. In spite of the fact that the correct figures must be known after fruition, reasonable appraisals can be made by taking a gander at the execution of comparable activities or ventures.

NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment

where R is the rate of return and T is the quantity of eras.

Computing NPV in Excel

While computing NPV for transient undertakings with basic money streams is genuinely direct, numerous activities require extra infusions of capital after beginning and take years to finish. In these cases, computing NPV by hand gets to be wasteful. Nonetheless, the NPV of any speculation or venture can undoubtedly be figured utilizing Microsoft Excel, given that money streams are equitably divided after some time.

To start with, enter the foreseen markdown rate into cell A1. Next, information all money streams successively into neighboring cells, entering any outpouring values as negative numbers. For instance, a venture with a solitary beginning speculation that is relied upon to create returns throughout three years will have four sections in cells A2 through A5. Exceed expectations accept all streams happen toward the end of every period. Along these lines, if the underlying speculation happens at venture initiation as opposed to toward the end of the principal time frame, then this figure should be added to the NPV work independently and excluded in the capacity itself.

In the event that the underlying venture happens toward the end of the main time frame, as the program accept, enter the equation \"=NPV(A1,A2,A3,A4,A5)\" into cell A6 to render the NPV for this venture.

In the event that the underlying speculation happens toward the start of the main time frame rather, enter the recipe \"=NPV(A1,A3,A4,A5)+A2\" to represent that underlying cost.

A Brief Example of NPV

Accept an organization needs to break down the anticipated gainfulness of a venture that requires an underlying cost of $10,000. Through the span of three years, the venture is required to create incomes of $2,000, $7,000 and $11,000, separately. The expected rebate rate is 4.5%. At first look, it appears the profits are about twofold the speculation. Be that as it may, a dollar earned in three years is not as significant as a dollar earned today, so the organization\'s bookkeeper computes the NPV as takes after to decide benefit while representing the reduced time estimation of the anticipated incomes:

NPV = {$2,000/(1+.045)^1} + {$7,000/(1+.045)^2} + {$11,000/(1+.045)^3} - $10,000

= $1,913.88 + $6,410.11 + $9,639.26 - $10,000

= $7,963.25