steps to calculate the NPV of the investment:
•
Identify the amount and timing of the cash flows required over the
life of the investment.
•
Establish an appropriate interest rate to be used for evaluating the
investment, typically called the required rate of return. (This rate is
also called the discount rate or hurdle rate.)
•
Calculate and evaluate the NPV of the investment.
•
If NPV > 0 then accept the project.

15
Net Present Value
•
Net present value (NPV) formula for an initial investment is:
where
N = number of time periods
t = time of the cash flow
Rt = the net cash flow (i.e. cash inflow – cash outflow, at time t.)
r = discount rate
= initial investment

16
Net Present Value
•
Net present value (NPV) formula for projects generating revenue
at varying rates over time is:
where
N = number of time periods
t = time of the cash flow
Rt = the net cash flow (i.e. cash inflow – cash outflow, at time t.)
i = discount rate
= initial investment

17
Internal Rate of Return (IRR)
•
Internal rate of return (IRR) is a metric used in capital budgeting to
estimate the profitability of potential investments. Internal rate of
return is a discount rate that makes the net present value (NPV) of all
cash flows from a particular project equal to zero. IRR calculations rely
on the same formula as NPV does (Investopedia, 2018).
•
When calculating IRR, expected cash flows for a project or investment
are given, and the NPV equals zero. The initial cash investment for the
beginning period will be equal to the present value of the future cash
flows of that investment (cost paid = present value of future cash
flows.
Hence, the net present value = 0).
•
Use IRR Excel Function

18
NPV or IRR
•
In capital budgeting, senior leaders would like to know the
returns on these investments, and the internal rate of return is
one method that allows them to compare and rank projects
based on their projected yield, and the one with the highest
internal rate of return is usually preferred (Corporate Finance
Institute, 2018).
•
Using NPV also works better when a project’s discount rate is
not known. The IRR has to be compared to the discount rate to
gauge a project’s feasibility. If the IRR is higher than the
discount rate, it’s a good project to pursue. If a project’s NPV is
above zero, it’s financially worthwhile (Investopedia, 2018).

Step 3: Discuss Capital
Budgeting
Capital Budgeting Discussion

20
Capital Budgeting
•
Capital budgeting is the process in which a business
determines and evaluates potential large expenses or
investments. These expenditures and investments
include projects such as building a new plant or
investing in a long-term venture. Often, a company
assesses a prospective project's lifetime cash inflows