## Calculate the Net Present Value

On Friday I received a question. **Should a project be accepted or not?** A simple question and should be peanuts for some people. Here are the information related to the project.

1. Investment: RM 1,000,000

2. Revenues: Year 1 – RM 250,000, Year 2 – RM 420,000 and Year 3 – RM 420,000.

3. Total Revenue is RM 1,090,000. **Net Revenue is RM 90,000.**

4. Discount rate = 10%

What do you think? Simple, right?

The thing is I did not study Accounting and I hardly paid attention during my Engineering Economics 101 in school. This should have been a breeze if otherwise..

It took me about an hour to figure this out. I am rusty all over when it comes to something such as this. Firstly, how do you determine whether this project is attractive or not? I hope you would not say based on the Net Revenue because that will be wrong. From school, the answer would be to **find out the Net Present Value (NPV) **of the project over the 3 years cycle. So, the next thing to do is look for the formula!

**Present Value (PV) = FV / (1 + i)^{t }**where

*FV*– the Future Value,

*t*– the time of the cash flow and

*i*– the annual interest rate

Based on that we need to calculate the Future Value *(FV)*. So, ** NPV would be the Sum of FV minus the Initial Investment. **Since the information provided the discount rate and not interest rate, therefore,

Discount Factor = ** 1 / (1 + i)^{t}**. Discount factor refers to the rate used to discount future cash flows to the present value. So, we then have,

*With all the above information in place, just use MS Excel and run the calculations:*

**FV = PV (1 / (1 + i)**^{t}).Based on the calculation above, the sum of the Future Value is only RM 889,932.38. As such, the Net Present Value will be -RM 110,067.62, a negative figure. The negative NPV makes this project unattractive. **We should not accept this project.**

So, if you do not understand this, don’t worry. Just don’t do the kind of job that I do.. Peace!

sengkangbabiesnow, you are teaching Project Management?

Papa Bearnot teach but do..

KNizamthese are my forte hehe

Papa Bearoh really? next time if I have related questions that I could not solve, I would be asking you..

meoi love this….

basic 4 corp finance & personal finance

Papa Bearyup, this is basic stuff..

BehradWhen I look at the formula etc I do get it but it’s not my thing! =) Instead… let me negotiate about prices, delivery terms, discounts etc with suppliers.. 😉

Papa Bearwell, we have our strengths and weaknesses and when put together, we make it whole..

Jerung Gergasihahhhh..ada gak amik engineering economics ni ..tapi ..mana la nak apply semua rumus tu. so net value formula is not right or what?

Papa Bearnothing is wrong with the formula. the question is about whether a project with the data given is attractive or not..

lankapoI just don’t have any idea what are u talking about hehe

Papa Bearhaha.. next time bos ko bagi project, ko mintak data macam kat atas. Dari situ ko akan tau project tu untung ke tidak..

teaqahwah…ni ade belajar dlm financial management ni

Papa Bearso sure kacang kan for you..

yasAduhhh….fenin suda bila tgk angka bebanyak tuuu…alahaiii….hehehehe

Papa Bearhaha.. susah sikit jer dari kira ikan nih..

yasHahaha…kira ikan mmg petik jari jek papabear….

Papa Beartapi susah bagi saya sebab nak bezakan jenis2 ikan. yg saya kenal ikan jerung, ikan buntal, ikan pari and ikan bawal… tapi even ikan bawal ada banyak jenis.. susah tuh…

Juanaku kira kira ni pon pening, hehe, aku dulu amik jurusan elektronik, mak aih, bnyk giler kira kira

Papa Bearmasa ambil Engineering tu tak da subject Engineering Econ ke?

Juanxdak pulak, naper, ko amik econ ker

Papa Beardulu aku ambil Engineering, Industrial dan salah satu core subject yg kena ambil ialah Engineering Econ..

suriuh tak sukannya math… jadi pembantu akaun keje pun tak lama sb tak minat..asal dpt keje bru baru blh hee..

hr masuk akaun mmg blur alahai..

Papa Bearsebenarnya saya pun tak suka math tapi terpaksa..

airaniezOk.My math is sooo not good after I left school.But I hope u can gain a lot of money in the future.Open table la bro..hihi

Papa Bearnot mine. company punya hehe..

miegue suka no ni..

teringin nak kembali blajo bermain nombor..

ehheee

Papa Bearjangan main nombor ekor dah le..

mienombor ekor jangan sekali dicuba..

eheheeee

teaqahhuhuhu….x suke time value…selalu konpius…

unlike..:(

Papa Bearnak senang cam ni la… kalau tahun ni RON95 RM 1.90, beebrapa bulan lagi atau tahun depan, kena naik kan harga dia, kalau tak, 1.90 in teh future tu dah tak da makna dah… bertambah konpius? 😀

bungaorenI dont realy like the kind of job that you do.

(-_-)y lets lepaking.. huhuhuhu… boleh ke pun.. nak lepak2..

Papa Bearboleh… kan bos cuti..

teaqahhahaha.dari dulu mmg konpius ngn time value..lg2 bile da kene tukaq1 formula..bila formula da tunggang terbalik..kene log bagai..jenuh

Papa Bearactually saya nak kena 1 jam baru boleh solve tu sebab tak perasan kena tukar formula bila guna discount rate.. hehe..

sufianback to basic, e=mc2 … hahahahahahahaha

Papa Beare=mc2 is more complicated than this..

ardinafenin… mcm mana nk berlakon jd PM ni..

Papa Bearberlakon kan senang.. buat betul2 yg susah..