Payback and NPV By Sahar Hussein 20120175067

The question 1)Calculate Payback. 2)Calculate NPV. 3)Calculate Ratio. Cost Benefit Year 0 5000 Year 1 1000 3500 Year 2 300 1800 Year 3 100 1200 1)Calculate Payback. 2)Calculate NPV. 3)Calculate Ratio. Note Discount rate 5% per year

Net = benefit – cost -(Year 0) net = 0 – 5000 = -5000 Year 1 1000 3500 2500 Year 2 300 1800 1500 Year 3 100 1200 1100 Net = benefit – cost -(Year 0) net = 0 – 5000 = -5000 -(Year 1) net = 3500 – 1000 = 2500 -(Year 2) net = 1800 – 300 = 1500 -(Year 3) net = 1200 – 100 = 1100

Payback (Year 0) cumulative = - 5000 Net cumulative Year 0 5000 Year 1 2500 Year 2 1500 1000 Year 3 1100 100 (Year 0) cumulative = - 5000 (Year 1) cumulative = -5000 + 2500 = -2500 (Year 2) cumulative = -2500 + 1500 = -1000 (Year 3) cumulative = -1000 + 1100 = 100 **In the third year we can cover the initial cost invested

NPV (Year 0) cumulative = -5000 + 0 = -5000 Net NPV- net cumulative Year 0 (5000) Year 1 2500 2381 (2619) Year 2 1500 1361 (1258) Year 3 1100 950 (308) (Year 0) cumulative = -5000 + 0 = -5000 (Year 1) cumulative = -5000+ 2381 = -2619 (Year 2) cumulative = -2619 + 1361 = -1258 (Year 3) cumulative = -1258 + 950 = -308 => it is not good investment

NPV Discount rate 5% per year (Year 0) NPV = -5000 Net NPV- net Year 0 (5000) Year 1 2500 2381 Year 2 1500 1361 Year 3 1100 950 Discount rate 5% per year (Year 0) NPV = -5000 (Year 1) NPV = 2500 /((1.05)^1) = 2381 (Year 2) NPV = 1500 /((1.05)^2) = 1361 (Year 3) NPV = 1100 /((1.05)^3) = 950

NPV (طريقة السلايد) NPV= -5000 + ((3500-1000/(1.05^1)) Cost Benefit Year 0 5000 Year 1 1000 3500 Year 2 300 1800 Year 3 100 1200 NPV= -5000 + ((3500-1000/(1.05^1)) + ((1800-300/(1.05^2 )) + ((1200-100/(1.05^3)) NPV=-5000 + 2381 + 1361 + 950 = -308  it is not good investment.

Ratio Cost NPV_cost Benefit NPV_benefit Year 0 5000 --> 5000 5000 --> 5000 0 --> 0 Year 1 1000 --> 952 3500 --> 3333 Year 2 300 --> 272 1800 --> 1632 Year 3 100 --> 86 1200 --> 1036 (Year 1) NPV_cost = 1000/ ((1.05)^1) = 952 (Year 1) NPV-benefit = 3500/ ((1.05)^1) = 3333 (Year 2) NPV_cost = 300/ ((1.05)^2) = 272 (Year 2) NPV-benefit = 1800/ ((1.05)^2) = 1632 (Year 3) NPV_cost = 100/ ((1.05)^3) = 86 (Year 3) NPV-benefit = 1200/ ((1.05)^3) = 1036 Sum of NPV-Cost = 5000 + 952 + 272 + 86 = 6283 Sum of NPV-Benefit = 0 + 3333 +1632 + 1036 = 6001 Ratio = (sum of NPV_Benefit) / (sum of NPV_Cost) = 6001/ 6283 = 0.95 If ratio <=1 don’t adopt the project If ratio >1 you can adopt the project

GOOD LUCK  9