Simple example of cash flow analysis (NPV)

Project with 1 year of construction and 3 years of operation

Years
Cash flows
MARR =

1
(200,000)
15%

2
100,000

3
100,000

4
100,000

NPV =
$24,628.27
Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods

Simple example of cash flow analysis (IRR)

Project with 1 year of construction and 3 years of operation
Years
Cash flows
MARR =

1
(200,000)
10%

2
100,000
15%

3
100,000
20%

4
100,000
25%

30%

NPV =
$44,259.27
$24,628.27
$8,873.46
($3,840.00) ($14,145.16)
Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods
IRR =
23%

NPV graph
$50,000.00
$40,000.00

NPV

$30,000.00
$20,000.00
$10,000.00
$0.00
($10,000.00)10%

IRR
15%

($20,000.00)
MARR

20%

25%

30%

Example of cash flow with ambiguous values for IRR

Project with 1 year of construction and 4 years of operation
Years
Cash flows
MARR =

1
$106,500
10%

2
($200,000)
15%

3
$100,000
20%

4
($100,000)
25%

5
$100,000
30%

NPV =
$451.19
($326.07)
($306.07)
$208.00
$1,016.62
Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods
IRR =
12% ?

NPV graph
$1,200.00
$1,000.00

NPV

$800.00
$600.00
$400.00

IRR?

$200.00
$0.00
($200.00)10%

15%

20%

($400.00)
MARR

25%

30%

Example of cash flow with ambiguous values for IRR

Project with 1 year of construction and 4 years of operation
Years
Cash flows
MARR =

1
$106,500
5%

2
($200,000)
10%

3
$100,000
15%

4
($100,000)
20%

5
$100,000
25%

Correcting the cash flows

Assuming re-investment rate of
Corrected C.F.
$0

5%
($88,175)

$4,762

$0

$100,000

NPV =
$2,488.80
($7,202.08) ($13,824.26) ($18,289.15) ($21,225.90)
Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods
IRR =
6%

NPV graph
$5,000.00

IRR

$0.00
NPV

5%
($5,000.00)

10%

($10,000.00)
($15,000.00)
($20,000.00)
($25,000.00)
M ARR

15%

20%

25%

Simple example of cash flow analysis (NPV)

Project with 1 year of construction and 3 years of operation
Years
Cash flows
MARR =
NPV =

1
(200,000)
15%

2
100,000

$24,628.27 IRR =

3
100,000

4
100,000

23%

Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods
Risk assumptions
Investment cost can be anything between 180,000 and 220,000
First year net income is most likely 100,000, but at worst 80,000 and at best 110,000
Final year net income is most likely 100,000, but at worst 70,000 and at best 120,000
Final year net income is most likely 100,000, but at worst 60,000 and at best 125,000
NPV
IRR
Worst Case
(220,000)
80,000
70,000
60,000
Best Case
(180,000) 110,000 120,000 125,000

Simple example of cash flow analysis (NPV)

Project with 1 year of construction and 3 years of operation
Years
Cash flows
MARR =

1
2
3
4
#ADDIN? #ADDIN? #ADDIN? #ADDIN?
15%

NPV =

#ADDIN? IRR =

#ADDIN?

Remark: it is assumed - as default in Excel - that the cash transactions are at the end of the periods
Risk assumptions
Investment cost can be anything between 180,000 and 220,000
First year net income is most likely 100,000, but at worst 80,000 and at best 110,000
Final year net income is most likely 100,000, but at worst 70,000 and at best 120,000
Final year net income is most likely 100,000, but at worst 60,000 and at best 125,000
NPV
IRR
Worst Case
(220,000)
80,000
70,000
60,000
Best Case
(180,000) 110,000 120,000 125,000