BUS 313

Is this project worth doing?

Name: Business Tutor
Address: Burnaby, BC, CA
Telephone: +1-604-916-5838
Price range: C$30–C$129

Value a project with NPV, then test the shortcuts managers also use: the book rate of return, payback and the IRR. See exactly when each one agrees with NPV, and when it steers you wrong.

Part 1 · The NPV rule · Step 1 of 11

Take a positive NPV; between rivals, take the highest

highest NPV: take itpositive, but a rival is betternegative: reject

Part 1 · The NPV rule · Step 1 of 11

Take a positive NPV; between rivals, take the highest

A project's net present value (NPV) is what its future cash is worth today, minus what it costs today. “Worth today” means discounted at the opportunity cost of capital r: the return you give up by not putting the same money into a market investment with the same risk. The rule: accept a project whose NPV is above zero, reject one below zero. When projects are mutually exclusive (doing one rules out the others), take the one with the highest NPV.

Try it: Lower the cost of capital to 5%: project C becomes the best. Raise it to 15%: none of the three is worth doing.

Opportunity cost of capital, r10%

	Today	Year 1	Year 2	Year 3	NPV
A	−10,000	3,000	4,500	5,000	+$203
B	−6,000	2,600	2,600	2,600	+$466
C	−15,000	0	6,000	13,000	−$274

Take project B. Its NPV is like being handed $466 today: borrow $6,466 against its future cash, pay the $6,000 cost, keep $466, and let the project's cash repay the loan.

NPV_B = −$6,000 + $2,600/1.10 + $2,600/1.10² + $2,600/1.10³ = +$465.82

Each year's cash is divided by (1 + r) once for every year it has to wait.

Check yourself

A project has an NPV of +$500 at its cost of capital. Taking it is like…

Midterm coming up and NPV vs IRR still feels slippery?

Bring your problem sets. We work through them together until every type feels routine.

Book a session Next toolNext: Risk, beta and the security market line

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Is this project worth doing?

Take a positive NPV; between rivals, take the highest

Take a positive NPV; between rivals, take the highest

A two-year machine: the IRR by the quadratic, checked by bisection

Midterm coming up and NPV vs IRR still feels slippery?

Questions, answered.

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