PROJECT INVESTMENT SUMMARY for

[Enter project name here]

How much cash will [Enter project name here] be throwing off annually? (beyond what it consumes) Year 1 NET CASH FLOW -475 Year 2 564 Year 3 1,008 Year 4 1,225 Year 5 2,795 Total 5,117

What is the current value (Net Present Value) of that cash? (based on what "cash"/capital currently costs your company and what other opportunities having that cash might create) Year 1 Year 2 Year 3 Year 4 Year 5 Total NPV 232

DISCOUNTED CASH FLOW STREAM

-114

-145

150

154

186

Does [Enter project name here] provide a greater return than a safer investment that the company might typically make with the same money?

INTERNAL RATE OF RETURN

42.8%

How long will it take for [Enter project name here] to pay back the investment that the company put into it?

PAYBACK PERIOD

3.2

Years

Directions Work through each of the following sheets: Net Cash Flow, Discounted Cash Flow, Internal Rate of Return, and Payback Period. Then this sheet (Project Investment Summary) will help you value this project as an invesment for your company.

NET PRESENT VALUE

Time (Year) 0 1 2 3 4 5 Cash Flow -100 475 564 1008 1225 2795

Enter a Rate value (0% - 100%):

15%

NET PRESENT VALUE

$3,492.29

Defining Net Present Value: Net present value (or NPV) is a standard method used when planning long-term investments. Using the NPV method, a potential investment project should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is greater than zero. Calculating the Net Present Value: Just how much present value should be discounted from future value value is determined by: (a) the amount of time between now and future payment, and (b) an interest rate. Most companies and organizations have interest rate guidelines to use for discounting; often they use their current cost of capital. The NPV calculation discounts each year's future value and then adds the discounted values for the entire cash flow stream. Desired Results: If the NPV is greater than the cost, the project will be profitable for you (assuming, of course, that your estimated cash flow is reasonably close to reality). If you have more than one project on the table, you can compute the NPV of both, and choose the one with the greatest difference between NPV and cost.

NET CASH FLOW (Full value cash flow in $)

Year 1 Cash Inflows / Other Monetary Gains Cash Inflow Item 1 Cash Inflow Item 2 Cash Inflow Item 3 Total Cash Inflows Cash Outflows / Costs & Expenses Cash Outflow Item 1 Cash Outflow Item 2 Cash Outflow Item 3 Total Cash Outflows Cash Flow Summary Total Inflows Total Outflows NET CASH FLOW 100 400 900 1,400

Year 2 150 645 999 1,794

Year 3 200 700 1,250 2,150

Year 4 300 900 1,500 2,700

-75 -300 -1,500 -1,875

-80 -400 -750 -1,230

-90 -497 -555 -1,142

-100 -650 -725 -1,475

1,400 -1,875 -475

1,794 -1,230 564

2,150 -1,142 1,008

2,700 -1,475 1,225

Defining Net Cash Flow: A basic financial metric in any business case, Net Cash Flow is at the heart of most ROI calculations as it is a reflection of net profit or loss of an investment. The concept of the time value of money does not come into play with this tool. Calculating the Net Cash Flow: Each important cost or benefit impact leads to an expected cash flow result, or is otherwise assigned value in cash flow terms. Cash flow statements are easier to understand and less prone to error if a simple plus/minus convention is followed: All cash inflows are positive numbers (no parenthesis, no minus signs) and all cash outflows are negative numbers (with parenthesis or minus sign). The total, after adding up all gains and losses, becomes the net cash flow.

Desired Results: Ideally, your investment is in excellent condition where your total cash inflow far outweighs the outflow figures.

Year 5 550 1,200 2,000 3,750

Total 1,300 3,845 6,649 11,794

-55 -300 -600 -955

-400 -2,147 -4,130 -6,677

3,750 -955 2,795

11,794 -6,677 5,117

case, Net Cash Flow is at the heart of most ROI t. The concept of the time value of money does not

pact leads to an expected cash flow result, or is are easier to understand and less prone to error if a ive numbers (no parenthesis, no minus signs) and all n). The total, after adding up all gains and losses,

where your total cash inflow far outweighs the outflow

DISCOUNTED CASH FLOW (Incremental cash flow in $)

Year 1 -125 Discounting at Year End: DISCOUNTED CASH FLOW STREAM -114

Year 2 -175

Year 3 200

Year 4 225

-145

150

154

Discounting at Mid-Year: DISCOUNTED CASH FLOW STREAM -119 -152 158 161

Enter an Interest Rate for discounting (0 - 100%)

10.0%

Defining Discounted Cash Flow: This is used to reflect the time value of money, allowing you to examine the return on investment by taking into consideration the present value of future dollars. When evaluating your discounted cash flow stream, ask yoursefl the following: How much is that future cash flow worth in todays dollars?

Calculating the Discounted Cash Flow: Widely used in investment finance, real estate development, and corporate financial management, the discounted cash flow (or DCF) approach describes a method to value a project or an entire company. The DCF methods determine the present value of future cash flows by discounting them using the appropriate cost of capital. This is due to opportunity cost and risk over time. The cash flows are discounted at a rate acceptable to the investor - say 10%. This rate is used to calculate a discount factor for each year; the first year's cash flows are only discounted for one year, but the fifth year's cash flow must be discounted for five years, so it's discounted by much more

Desired Results: That return rate may seem low, but it is still positive after all of our discounting, suggesting that the investment decision is probably a good one: it produces enough profit to compensate for opportunity cost and risk with a little extra left over. When investors and managers perform DCF analysis, the important thing is that the net present value of the decision after discounting all future cash flows at least be positive (more than zero). If it is negative, that means that the investment decision would actually lose money even it appear to generate a nominal profit.

Year 5 300

Total 425 NPV

186

232

NPV 195 243

value of money, allowing you to examine the return on dollars. When evaluating your discounted cash flow w worth in todays dollars?

nt finance, real estate development, and corporate h describes a method to value a project or an entire cash flows by discounting them using the appropriate he cash flows are discounted at a rate acceptable to tor for each year; the first year's cash flows are only ounted for five years, so it's discounted by much more.

ive after all of our discounting, suggesting that the ofit to compensate for opportunity cost and risk with a nalysis, the important thing is that the net present be positive (more than zero). If it is negative, that n it appear to generate a nominal profit.

INTERNAL RATE OF RETURN (Incremental cash flow in $)

Year 1 -125

Year 2 -175

Year 3 200

Year 4 225

Year 5 300

Enter an Initial Guess for the IRR (0% - 100%) :

10%

INTERNAL RATE OF RETURN

42.8%

Defining Internal Rate of Return: The Internal Rate of Return (IRR) looks at the value of investing the same amount of money the company is considering investing in the initiative in a simple savings instrument such as a GIC or savings account. If you can invest the money at 15%, does the initiative provide the same or greater yield over the discussed period?

Calculating the Internal Rate of Return: Spreadsheets and financial calculators find the IRR for a cash flow stream by trial and error. There is no "clean" analytic solution. Fortunately Excel will do all the trial and error work for you if you tell it where to find the cash flow stream and give it a starting guess for the IRR. The spreadsheet then (very quickly) uses the guess as the interest rate for an NPV calculation and, if NPV is not zero, tries a different interest rate and recalculates NPV. If the result is closer to 0, it changes the interest rate in the same direction again, otherwise it changes the interest rate in the other direction, and recalculates through many iterations until 0 NPV is reached. The iterations happen quickly, "behind the scenes," and all you see in the spreadsheet cell is the IRR result.

Desired Results: The higher the interest rate (that is, the higher the IRR), the more robust the investment and the better the returns compare to the costs.

Total 425

R) looks at the value of investing the same amount of mple savings instrument such as a GIC or savings ovide the same or greater yield over the discussed

cial calculators find the IRR for a cash flow stream by cel will do all the trial and error work for you if you tell the IRR. The spreadsheet then (very quickly) uses not zero, tries a different interest rate and rate in the same direction again, otherwise it changes ny iterations until 0 NPV is reached. The iterations sheet cell is the IRR result.

e IRR), the more robust the investment and the better

PAYBACK PERIOD (Incremental cash flow in $)

Year 1 300 -450 -150 -150 Year 2 250 -500 -250 -400 Year 3 450 -100 350 -50 Year 4 225 45 270 220 Year 5 475 55 530 750

Total incremental inflows Total incremental outflows Net Incremental Cash Flow Cumulative Incremental Cash Flow

PAYBACK PERIOD

3.2

Years

Defining Payback Period: Simply put, Payback Period is the length of time it will take to recoup an investment. It define exact point at which the revenues (cash inflows) from an initiative equal the costs (cash outflows).

Calculating the Payback Period: Payback period is a measure of time, usually given in decimal years, such as "Paybac 3.2 yrs." (Or decimal months, or weeks). Payback is sometimes viewed as a measure of risk: the longer the payback, the the risk. Desired Results: Other things being equal, the investment or action with the shorter payback is the better option.

Total 1,700 -950 750 370

me it will take to recoup an investment. It defines the e costs (cash outflows).

usually given in decimal years, such as "Payback = s a measure of risk: the longer the payback, the higher

the shorter payback is the better option.