1. Payback and NPV
By Sahar Hussein

2. 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

3. 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
-(Year 1) net = 3500 – = 2500
-(Year 2) net = 1800 – 300 = 1500
-(Year 3) net = 1200 – 100 = 1100

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

5. 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 = =
(Year 1) cumulative = = -2619
(Year 2) cumulative = = -1258
(Year 3) cumulative = = -308
=> it is not good investment

6. 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 =
(Year 1) NPV = /((1.05)^1) = 2381
(Year 2) NPV = /((1.05)^2) = 1361
(Year 3) NPV = 1100 /((1.05)^3) = 950

7. 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= (( /(1.05^1))
+ (( /(1.05^2 ))
+ (( /(1.05^3))
NPV=
=  it is not good investment.

8. Ratio Cost NPV_cost Benefit NPV_benefit Year 0 5000 --> 5000
>
> 0
Year 1
> 952
>
Year 2
> 272
>
Year 3
> 86
>
(Year 1) NPV_cost = 1000/ ((1.05)^1) = (Year 1) NPV-benefit = 3500/ ((1.05)^1) = 3333
(Year 2) NPV_cost = 300/ ((1.05)^2) = (Year 2) NPV-benefit = 1800/ ((1.05)^2) = 1632
(Year 3) NPV_cost = 100/ ((1.05)^3) = (Year 3) NPV-benefit = 1200/ ((1.05)^3) = 1036
Sum of NPV-Cost = = 6283
Sum of NPV-Benefit = = 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

9. GOOD LUCK  9