4822 l6 project evaluation npv

PROJECT MANAGEMENT

Project Evaluation

CLASS ACTIVITY 6For your particular project each group shall itemise the project’s cost and evaluate the worth of the project using NPV method. The interest shall be at 10%

Each group shall have 5 minutes to present its finding.

Marks will be given based on the presentation

AIM OF EVALUATION• To determine whether the a project is

economically viable

TOOLS OF EVALUATION• Net Present Value Method (NPV)• Internal Rate of Return Method (IRR)• Equivalent Uniform Annual Cost Method

(EUAC)• Cost Benefit Analysis Method (CBA)

WHAT DOES NPV DO?• It calculate the value of the project at the

time of evaluation

WHAT DOES IRR DO?• It calculate the rate of return of the project

WHAT DOES EUAC DO?• It calculate the equivalent uniform annual

cost of the project.

WHAT DOES CBA DO?• It calculate the benefit-over-cost ratio of

the project.

BUT WHY DIFFERENT TYPES?

WHEN TO USE NPV?• To know the total worth of the project

WHEN TO USE IRR?• To compare the rate of return of the

project against some preferred rate

WHEN TO USE EUAC?• When the investor is concern on the

amount of money to be acquired/allocated annually/periodically to maintain the project.

WHEN TO USE CBA?• When the evaluation requires the use of

social interest rate

WHAT IS SOCIAL INTEREST RATE?

• Rates applicable to socioeconomic projects

WHCH ONE IS SOCIOECONOMIC PROJECT?

• Public investment project

EXAMPLE OF PUBLIC INVESTMENT PROJECT?

• Penang Bridge• The Blue Mosque• KLIA• etc

HOW TO PERFORM NPV? Step 1

• Determine P, F, A, i, nP0 = initial costF = +ve or –ve discrete paymentA = uniform periodical paymenti = interest raten = project life

CALCULATING NPV – Step 2• Put P, F, A, I and n on a cashflow diagram

C/flow

F

n

i = x% per yearA2

0

P0

A1

1 2 3 4 5 10

CALCULATING NPV – Step 3• Convert A1 and A2 into its equivalent value

at n = 0• i.e into another P value• Where P = A(P/A/i/n)

Discounting factor

Read the discounting factor from an interest table

Interest table

Top part of the interest table

Top part of the interest table

CALCULATING NPV – Step 4• Convert F into its equivalent value at n = 0• P = F(P/F/i/n)

CALCULATING NPV – Step 5• Add all P to give NPV, i.e• NPV = -P0 – A1(P/A/i/n) + A2(P/A/i/n)

+ F(P/F/i/n)

EXAMPLE

• Initial cost = RM64,000.00• Salvage value = RM32,000.00• Yearly income = RM15,000.00• Year maintenance = RM3,200.00• Investment life = 5 yaers• Interest rate = 10%

CASHFLOW DIAGRAM

i = 10% per yearC/flow

32K

n

15K

0

64K3.2K

1 2 3 4 5 10

CALCULATING NPV

NPV = -P0 – A1(P/A/i/n) + A2(P/A/i/n) + F(P/F/i/n)= -64,000 – 3200(3.7908) + 15000( 3.7908)

+ 32000(0.6209)= -64000 – 12130.56 + 56862.00 + 19868.8= 600.24