Project viability assessment through Net Present Value (NPV) - Revision history

Valdemar Vium: /* References */

2023-05-05T11:50:03Z

References

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	<ref name="TVM"> Gardner, N.D. 2004. The Time Value of Money: A Clarifying and Simplifying Approach. Journal of College Teaching & Learning (TLC). 1, 7 (Jul. 2004).</ref>		<ref name="TVM"> Gardner, N.D. 2004. The Time Value of Money: A Clarifying and Simplifying Approach. Journal of College Teaching & Learning (TLC). 1, 7 (Jul. 2004).</ref>

	~~<ref name="NPV"> Investopedia. (2023). Net Present Value (NPV): What It Means and Steps to Calculate It. Investopedia, 1–8. https://www.investopedia.com/terms/n/npv.asp</ref>~~

	<ref name ="NPV_H"> Häcker, J., & Ernst, D. (2017). Financial Modeling, Global Financial Markets. 343-384. </ref>		<ref name ="NPV_H"> Häcker, J., & Ernst, D. (2017). Financial Modeling, Global Financial Markets. 343-384. </ref>

Valdemar Vium: /* Abstract */

2023-05-05T11:49:47Z

Abstract

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	== Abstract ==		== Abstract ==

	The '''Net Present Value (NPV)''' is a widely used financial metric in project management. Its purpose is to evaluate the profitability of a proposed project by aggregating the streams of costs and benefits into a single value. This makes for an effective indicator of identifying profitable projects when assessing multiple projects at a time. For a given project to be considered a profitable investment, its NPV must be larger than zero<ref name="~~NPV~~"/>.		The '''Net Present Value (NPV)''' is a widely used financial metric in project management. Its purpose is to evaluate the profitability of a proposed project by aggregating the streams of costs and benefits into a single value. This makes for an effective indicator of identifying profitable projects when assessing multiple projects at a time. For a given project to be considered a profitable investment, its NPV must be larger than zero<ref name="DSSA"/>.

	Central to the calculation of the NPV is assigning varying weights, dependent on time, to the benefits and costs through the utilization of a so-called discount factor, which is calculated using a discount rate. The discount rate represents the rate of interest that is used to discount all future costs and benefits<ref name="DSSA"/>. By incorporating this principle, the NPV accounts for and subscribes to the paradigm of the time value of money, referring to the idea that money has a different value at different points in time<ref name ="TVM"/>.		Central to the calculation of the NPV is assigning varying weights, dependent on time, to the benefits and costs through the utilization of a so-called discount factor, which is calculated using a discount rate. The discount rate represents the rate of interest that is used to discount all future costs and benefits<ref name="DSSA"/>. By incorporating this principle, the NPV accounts for and subscribes to the paradigm of the time value of money, referring to the idea that money has a different value at different points in time<ref name ="TVM"/>.

Valdemar Vium: /* Annotated Bibliography */

2023-05-02T07:27:46Z

Annotated Bibliography

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	'''AXELOS. Managing Successful Projects with PRINCE2 2017 Edition. London: The Stationery Office Ltd, 2017. Accessed May 2, 2023. ProQuest Ebook Central.'''		'''AXELOS. Managing Successful Projects with PRINCE2 2017 Edition. London: The Stationery Office Ltd, 2017. Accessed May 2, 2023. ProQuest Ebook Central.'''

	In the following book, there is a continuous emphasis on the importance of projects meeting an actual business need and providing value for money. According to PRINCE2, the business perspective is one of three principal project interests, which come together to ensure the success of a project. The book cements the purpose of assessing projects through the lens of a business perspective, to implement mechanisms to decide whether the project is profitable, and viable and can aid decision-making regarding investment. The book gives a few examples of the mechanisms, which include NPV.		In the following book, there is a continuous emphasis on the importance of projects meeting an actual business need and providing value for money. According to PRINCE2, the business perspective is one of three principal project interests, which come together to ensure the success of a project. The book cements the purpose of assessing projects through the lens of a business perspective, to implement mechanisms to decide whether the project is profitable, and viable and can aid decision-making regarding investment. The book gives a few examples of the mechanisms, which include NPV.



	~~s desirable, viable, and achievable as a means to support decision-making in its investment.~~

	~~In section 6, the book cements the purpose of assessing projects through one of three principal project interests, business,~~

	== References ==		== References ==

Valdemar Vium: /* Annotated Bibliography */

2023-05-02T07:27:34Z

Annotated Bibliography

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	In the following book's section 2, there is a clear emphasis on how financial metrics, such as the NPV, can quantify and measure business value. It is given in the wider context of monitoring projects and ensuring that the project delivery stays aligned with the business case and the benefits realization plans.		In the following book's section 2, there is a clear emphasis on how financial metrics, such as the NPV, can quantify and measure business value. It is given in the wider context of monitoring projects and ensuring that the project delivery stays aligned with the business case and the benefits realization plans.

			'''AXELOS. Managing Successful Projects with PRINCE2 2017 Edition. London: The Stationery Office Ltd, 2017. Accessed May 2, 2023. ProQuest Ebook Central.'''

			In the following book, there is a continuous emphasis on the importance of projects meeting an actual business need and providing value for money. According to PRINCE2, the business perspective is one of three principal project interests, which come together to ensure the success of a project. The book cements the purpose of assessing projects through the lens of a business perspective, to implement mechanisms to decide whether the project is profitable, and viable and can aid decision-making regarding investment. The book gives a few examples of the mechanisms, which include NPV.



			s desirable, viable, and achievable as a means to support decision-making in its investment.

			In section 6, the book cements the purpose of assessing projects through one of three principal project interests, business,

	== References ==		== References ==

Valdemar Vium: /* Examples */

2023-05-02T06:45:58Z

Examples

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	== Examples ==		== Examples ==

	'''Example 1: Simple calculation of the present value'''		'''Example 1: Simple calculation of the present value (Own creation)'''

	Considerating the value of €250.000,00 euro in the year 2023, what's the present value in the year 2028, using a discount rate of 3.5%?		Considerating the value of €250.000,00 euro in the year 2023, what's the present value in the year 2028, using a discount rate of 3.5%?
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	'''Example 2: Calculation of the NPV of a construction project'''		'''Example 2: Calculation of the NPV of a construction project (Own creation)'''

	In the following example, let's consider this hypothetical construction project, Gotta Go Fast 2023, which is a new road going from Borups allé, Nordvest 2400, in Copenhagen to DTU Building 408, Auditorium 413. The construction is estimated to take 3 years, and the opening of the road will be is scheduled to open in year 0. First-year impacts are identified and estimated to be the following:		In the following example, let's consider this hypothetical construction project, Gotta Go Fast 2023, which is a new road going from Borups allé, Nordvest 2400, in Copenhagen to DTU Building 408, Auditorium 413. The construction is estimated to take 3 years, and the opening of the road will be is scheduled to open in year 0. First-year impacts are identified and estimated to be the following:
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	The NPV is calculated by aggregating all the discounted costs and benefits, in this particular case being: Construction cost, maintenance cost, travel time savings, accident savings, and emissions improvements. The NPV for the hypothetical project, Gotta Go Fast 2023, has a value of -€2,401,933, which deems the project unprofitable. Therefore, sadly, you cannot expect to see a new road going from Nordvest to DTU being established any time soon.		The NPV is calculated by aggregating all the discounted costs and benefits, in this particular case being: Construction cost, maintenance cost, travel time savings, accident savings, and emissions improvements. The NPV for the hypothetical project, Gotta Go Fast 2023, has a value of -€2,401,933, which deems the project unprofitable. Therefore, sadly, you cannot expect to see a new road going from Nordvest to DTU being established any time soon.

	'''Example 3: Ranking of alternatives of projects'''		'''Example 3: Ranking of alternatives of projects (Own creation)'''

	In the following example, the global food manufacturer, APPM, seeks to expand its program of sugary sweets with an additional treat for the Scandinavian market. To do so, they have an array of potential production lines to choose from, capable of producing one respective sugary treat in their current factory placed in Sweden. The potential production lines are interdependent, and the program manager applies a univocally discount rate to all the potential investments, when calculating the respective NPVs, seen below in table 5:		In the following example, the global food manufacturer, APPM, seeks to expand its program of sugary sweets with an additional treat for the Scandinavian market. To do so, they have an array of potential production lines to choose from, capable of producing one respective sugary treat in their current factory placed in Sweden. The potential production lines are interdependent, and the program manager applies a univocally discount rate to all the potential investments, when calculating the respective NPVs, seen below in table 5:

Valdemar Vium: /* Discount rate */

2023-05-02T06:43:50Z

Discount rate

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	The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.		The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.

	~~'''Selection of discount rate'''~~

			== Selection of discount rate ==
	The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:		The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:

Valdemar Vium: /* Selection of discount rate */

2023-05-02T06:42:29Z

Selection of discount rate

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	The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.		The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.

	== Selection of discount rate ==		'''Selection of discount rate'''

	The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:		The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:

Valdemar Vium: /* Discount rate */

2023-05-02T06:42:09Z

Discount rate

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	[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]		[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]

	The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.		The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.


	== Selection of discount rate ==		== Selection of discount rate ==

Valdemar Vium: /* Discount rate */

2023-05-02T06:41:35Z

Discount rate

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	[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]		[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]

	The discount rate is the interest rate ~~used~~ to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how a		The discount rate is the interest rate to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how different discount rates modulate the discount factor, thus influencing the NPV of a given project, see Figure 2.


			== Selection of discount rate ==

	The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:		The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:

Valdemar Vium: /* Discount rate */

2023-05-02T06:39:56Z

Discount rate

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	[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]		[[File:Discountrateversus.png\|thumb\|500px\|right\|Figure 2: Discount factor versus discount rate. The discount factor as a function of t and the discount rate r. Own creation. Inspiration drawn from<ref name="DSSA"/>.]]

	The discount rate is the interest rate used to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite.		The discount rate is the interest rate used to convert future cash flows into an equivalent one-off upfront sum or present value <ref name="DISCOUNT"/>. As the discount rate increases, the lower the present value of a given future amount becomes. Hence the magnitude of the discount rate exerts a significant influence on the net present value. For instance, if the selected discount rate level is set too high, it may make potentially good projects, programs or portfolios seem unattractive, whereas if set too low, it might result in the opposite. To see how a

	The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few:		The selection of an appropriate discount rate can be a very exhaustive and challenging task, as the decision is dependent on multiple factors, to name a few: