Investment Analysis
Introduction
In this lesson you'll learn how to use EXCEL's built in NPV() and IRR() functions to evaluate an investment opportunity. You will also learn how to use various PMT() functions to evaluate a loan.
Evaluating an Investment
One of the ways project managers evaluate whether or not to take on a project is by doing what is called a Net Present Value (NPV) analysis and calculating the Internal Rate of Return (IRR). These two related measures are useful for comparing the investment it will take to complete the project against an alternative investment.
Net Present Value
The underlying premise of NPV is that a dollar today is worth more than a dollar earned in the future. The reason this is true is because of inflation, which reduces the purchasing power of the dollar over time. For example, something that cost $1.00 in 1980 would cost approximately $2.09 in the year 2000.What this means is that the purchasing power (or worth) of the dollar was half as much in 2000 as it was in 1980.
When taking on a project, a project manager must decide if the expected return from the project in the future is greater than investing in something else or doing nothing at all. Net Present Value aids in making that decision.
Internal Rate of Return
Internal Rate of Return is the rate that will make the NPV equal to zero. Or, put another way, it's the rate of return to make the proposed investment break even with an alternative investment.
The formulas for NPV and IRR are relatively complex. Lucky for us, EXCEL provides the functionality to calculate NPV and IRR for us!
Attachment:- Investment Analysis.rar