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PM Introduction PDF

[1] The document discusses various financial metrics used for project evaluation including net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI). [2] It provides examples of calculating these metrics and comparing projects based on each. [3] Additional Excel functions for financial analysis are also introduced such as modified internal rate of return (MIRR), XNPV, and XIRR.

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55 views39 pages

PM Introduction PDF

[1] The document discusses various financial metrics used for project evaluation including net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI). [2] It provides examples of calculating these metrics and comparing projects based on each. [3] Additional Excel functions for financial analysis are also introduced such as modified internal rate of return (MIRR), XNPV, and XIRR.

Uploaded by

bhaskkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Project Management

Module 6 : Financial Aspects


Session Coverage
• Overview: Importance of Financial Analysis in

Project Management. Syllabus Coverage. revision of

TVM

• NPV and IRR , Payback periods

• Discounted Payback periods, Profitability Index

(PI)

• Excel based decision making (XIRR,XNPV,MIRR)

• Preparation of Projected statements of income-

expenditure
Why Finance???
Introduction
CAPITAL expenditure decisions are concerned with
decisions regarding investment of funds in fixed and
current assets for getting returns for a number of years.
Such decisions are extremely important because of
following reasons:
(i) Substantial sums of money are involved.
(ii) It may be difficult to reverse the decision.
(iii) Such decisions have considerable impact on
the future of a firm.
Through Problems : Decision Models

1. Payback Period – Given the cash flows of the four projects, A, B, C, and

D, and using the Payback Period decision model, which projects do you

accept and which projects do you reject with a three year cut-off period for

recapturing the initial cash outflow? Assume that the cash flows are

equally distributed over the year for Payback Period calculations.


Contd…..
Projects A B C D
Cost $10,000 $25,000 $45,000 $100,000
Cash Flow Year $4,000 $2,000 $10,000 $40,000
One
Cash Flow Year $4,000 $8,000 $15,000 $30,000
Two
Cash Flow Year $4,000 $14,000 $20,000 $20,000
Three
Cash Flow Year $4,000 $20,000 $20,000 $10,000
Four
Cash Flow year $4,000 $26,000 $15,000 $0
Five
Cash Flow Year $4,000 $32,000 $10,000 $0
Six
Solution

Project A: Year One: -$10,000 + $4,000 = $6,000 left to


recover

Year Two: -$6,000 + $4,000 = $2,000 left to


recover

Year Three: -$2,000 + $4,000 = fully recovered

Year Three: $2,000 / $4,000 = ½ year needed for


recovery
NET and PRESENT VALUE.

Lets’ start with Present Value: Assume you are presented with

the following choices:

1. Someone offers you to give you 100 INR today.

2. Someone offers you to give you 100 INR one year from today.
Present Value is today’s value of an amount of money in the future.

Now, let’s make it a bit harder. How about this choice:

1. Someone offers you to give you 100 INR today.

2. Someone offers you to give you 109 INR one year from today.
Net Present Value is used to

calculate the total of all cash flows

(in and out) that can be directly

linked to your project. If it is positive,

good. Otherwise, you might

reconsider the investment.


Example: Let us say you can get 10% interest on your money.
So $1,000 now can earn $1,000 x 10% = $100 in a year.
Your $1,000 now becomes $1,100 next year.

We say that $1,100 next year has a Present Value of $1,000.

Because $1,000 can become $1,100 in one year (at 10% interest).
Present Value -> Future Value

Future Value -> Present Value


Profitability Index, PI***

Definition

The profitability index (PI) is one of the methods used in capital

budgeting for project valuation. In itself it is a modification of the

net present value (NPV) method.

The difference between them is that the NPV is an absolute

measure, and the PI is a relative measure of a project


Try this ....
With initial investment of 40000 in an Advt.
●

Project,following details were attained :


Internal Rate of Return
What is IRR? Simply stated, the Internal rate of
return (IRR) for an investment is the percentage
rate earned on each dollar invested for each period
it is invested. IRR is also another term people use
for interest. Ultimately, IRR gives an investor the
means to compare alternative investments based
on their yield.

Mathematically, the IRR can be found by setting


the Net Present Value (NPV) equation equal to zero
(0) and solving for the rate of return (IRR).
Step-by-Step Example and Proof
of IRR
This process of increasing the outstanding
“internal” investment amount continues all the
way through the end of year 5 when we receive
our lump sum return of $161,051.

IRR is clearly the percentage rate earned on each


dollar (or Rs) invested for each period it is invested.
Note**
It doesn’t always equal the annual compound
rate of return on an initial investment.
Contd…
Example : an investment of $100,000 is made
today and in exchange we receive $15,000 every
year for 5 years, plus we also sell the asset at the
end of year 5 for $69,475.
Important
This extra cash flow results in capital recovery,
thus reducing the outstanding amount of capital
we have remaining in the investments.

says nothing about what happens to capital


taken out of the investment. And contrary to
popular belief, the IRR does not always
measure the return on your initial investment.
Note
It doesn’t always equal the annual compound
rate of return on an initial investment.
● Note: MIRR,XNPV.......what's so different ?
● Hint : look in Excel Functions.

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