Using Excel

Financial Tools: Present Value Analysis

Instructions:

1. Study the background information very carefully

2. Apply your skills

Background Information:

You must compare two competing projects and select the most profitable one.

Both projects are developed in Year 0, and have a six-year useful life.

Both projects have total costs of $18,000 and total benefits of $25,000.

Although the total costs and benefits are identical, the timing is very different:

- Project A incurs the entire cost of $18,000 in Year 0. The Year 0 factor is 1.0, because these are current dollars. The $25,000 in benefits is received $5,000 each year, during Years 1 through 6.

- Project B is the reverse of Project A. In Project B, the entire benefit of $25,000 is recovered at the end of Year 0. Again, the Year 0 factor is 1.0, because these are current dollars. However, the $18,000 in costs is incurred at $3,000 per year during Years 1 through 6.

Assume that the discount factor is 10%. You can use the table in the textbook, or you can use the Microsoft Excel NPV factor, as described in the Video Learning Session.

Apply Your Skills

A: Using the Background Information, create a worksheet to show the net present value of both projects. You can develop your own format, or use a template that contains many built-in formulas.