%

%
0
1
2
3
4
5
6
7
8
8
Net Cash
Flow
PV of Cash
Flow
Cum. Cash
Flow
0
50
60
110
900
1
0
2
Option 3
Net Cash
Flow PV Factor
Net Cash
Flow
PV of Cash
Flow
Cum. Cash
Flow
Option 1 Option 2
1200
2000
2500
3300
Option
Number
Do Nothing
Purchase Machine A
Purchase Machine B
Purchase Machine A&B
Purchase Machine C
3
4
5
83%
75%
68%
62%
150
200
Annual
Disbursement
-1,000
200
200
200
200
200
200 56%
51%
47%
47%
100%
91%
-1,000 -1,000 -1,200 -1,200
150 -503 270 203
200
200
200
270 152
182 -818 270 245 -955 390
-1,200 -2,000
165 -653 270 223 -731 390
137 -366 270 184 -344 390
-529 390
124 -242 270 168 -176 390
103 -26 270 139 114 390
113 -129 -24 390
93 160 220 103 343 420
93 67 270 126 240 390
NPV Analysis of Mutually Independent Projects
(up to 20 years)
Years of Return of Projects
MARR (Minimum Acceptable Rate of Return)
Interest Rate
Year
8
10
10
The best option is Option 5 with the largest Net Present Value
NPV Analysis of the Projects
Investment Options (order the options in the increasing order of Initial Investments
Annual Return
0
250
330
500
600
Purchase Machine A&C
Explanation
Initial
Investments
0
1000
-200 -100 0
Option 1
Option 2
Option 3
Option 4
Option 5
0
200
220
420
Option 5
Net Cash
Flow
PV of Cash
Flow
Cum. Cash
Flow
Option 3
PV of Cash
Flow
Cum. Cash
Flow
Option 4
Net Cash
Flow
PV of Cash
Flow
Cum. Cash
Flow
0
200
Scrap Value at
the end
NPV of the
Projects
0
160
343
277
-99
528
0
200
270
390
450
700
Annual Net Cash
Flow
-2,500 -3,300 -3,300 -3,300 -2,000 -2,000 -2,500 -2,500
450 372 -1,719 700 579 -2,085
636 -2,664
322 -1,323
355 -1,645 450 409 -2,091 700
-1,381 700 526 -1,559 293 -1,030 450 338
-646
478 -1,081
242 -522
266 -764 450 307 -1,074 700
450 279 -794 700 435
450 231 -309 700 359 108
395 -251
200 -101
220 -301 450 254 -540 700
528
327 434
196 277
182 81 450 210 -99 700
0 0 -99 200 93
NPV Analysis of Mutually Independent Projects
The option can be taken
The option can be taken
The option can be taken
This option should not be taken.
The option can be taken
Investment Options (order the options in the increasing order of Initial Investments
100 200 300 400 500 600
NPV
a
1
2
3
IRR 10
5
528
NPV 0 Do Nothing Option 5
Option 1 160 160 Option 1 TRUE
Option 2 343 343 Option 2 TRUE 0
Option 3 277 277 Option 3 TRUE 1
Option 4 -99 -99 Option 4 FALSE 2
Option 5 528 528 Option 5 TRUE 3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
C
Calculatons and Chart Data
number 4 a
first 1 a <10
second 2 >1 a
third 3 a >2
fourth 5 >3 a
fifth 10 >5
0.137044742 0.167390279 0.131513594 0 0.140766703 0.313098215 0.125999743 0
1 2 3
TRUE TRUE TRUE FALSE TRUE TRUE TRUE FALSE
1 2 3 4 5 1and2 1and3 1and4
14% 17% 13% 9% 14% 31% 13% 5%
TRUE TRUE TRUE FALSE TRUE TRUE TRUE FALSE
TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
1and2 1and3 1and4
-1,000 -1,200 -2,000 -2,500 -3,300 -200 -1,000 -1,500
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 270 390 450 700 70 190 250
200 220 420 0 200 20 220 -200
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
Calculatons and Chart Data
0.1425141 0 0 0 0.123941372 0 0 0 0.157106859 0
4 5 6 7 8 9 10 11 12 13
TRUE FALSE FALSE TRUE FALSE TRUE
1and5 2and3 2and4 2and5 3and4 3and5
14% #NUM! -2% 12% #NUM! 16%
TRUE FALSE TRUE FALSE TRUE FALSE FALSE FALSE TRUE FALSE
TRUE FALSE FALSE TRUE TRUE FALSE FALSE FALSE TRUE FALSE
1and5 2and3 2and4 2and5 3and4 3and5
-2,300 0 -1,300 -2,100 -500 -1,300
500 -25 180 430 60 310
500 -47 180 430 60 310
500 -67 180 430 60 310
500 -86 180 430 60 310
500 -102 180 430 60 310
500 -118 180 430 60 310
500 -131 180 430 60 310
500 -144 180 430 60 310
0 -117 -220 -20 -420 -220
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
Calculatons and Chart Data
TRUE
TRUE
0 0 0
14 15 16 IRR current best
FALSE first best 13.70% 1
4and5 best&second 31.31% 2
28% best&third 0.00% 2
FALSE FALSE FALSE best&fourth 12.39% 5
FALSE FALSE TRUE best&fifth -10000.00% 5
Inc.IRR MARR
4and5 1 Opt1 13.70% 10.00% TRUE TRUE
-800 2 Opt(2-1) 31.31% 10.00% TRUE TRUE
250 3 Opt(3-2) 0.00% 10.00% TRUE TRUE
250 4 Opt(5-2) 12.39% 10.00% TRUE TRUE
250 5 10.00% TRUE TRUE
250 TRUE
250
250
250
250
200
0
0
0
0 0 FALSE
0 1 FALSE
0 2 FALSE
0 3 FALSE
0 4 FALSE
0 5 FALSE
0 6 FALSE
0 7 FALSE
8 FALSE
9 TRUE
10 FALSE
Calculatons and Chart Data
11 FALSE
12 FALSE
13 FALSE
14 FALSE
15 FALSE
16 FALSE
17 FALSE
18 FALSE
19 FALSE
20 FALSE
1
2
3
5
Incremental IRR Calculations:
Incremental IRR Analysis of the Projects
Option 5 is the best option for the investment in Incremental IRR Analysis
12.39%
Current Best
Opt1
Opt2
Opt2
Opt5 Opt(5-2)
Opt(3-2)
10.00%
IRR Analysis of Mutually Independent Projects
Options with negative NPV are eliminated from Incremental IRR Analysis.
Options to be investigated and their Internal Rates of Returns:
Options
Minimum Acceptable Rate of Return:
Also options with IRR smaller than MARR are eliminated.
IRR
0.00%
Purchase Machine A
Purchase Machine B
Purchase Machine A&B
Purchase Machine A&C
Opt(2-1)
Opt1
Inc. IRR
13.70%
31.31%
13.70%
16.74%
13.15%
14.08%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
IRR Analysis of Mutually Independent Projects
Opt1 Opt(2-1) Opt(3-2) Opt(5-2)
Inc.IRR
MARR
0
1
2
3
4
5
0
A = Current Best Option Elminate options with negative NPV
B = Challenger Option and with IRR<MARR
Let N = number of remaining options
1
Set A =1, B = 2
2
B ?=? N+1 no

yes

A is the best option.

end
INCREMENTAL IRR ANALYSIS
3
IRR of (B - A) <MARR B = B+1
return to 2

>=MARR

A = B and B = B+1
return to 2
INCREMENTAL IRR ANALYSIS
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