FTTH Business Guide - AWT.be

The NPV is 1,650 and is the sum of the DCF figures calculated in the line above.
Please note that this example ignores the benefit of any expected cash flows after
year 7 which, as fibre lasts many years, could be considerable.
The basic conclusion that can be drawn with this figure is that if it is greater than
zero, the project is worth executing. If it is less than zero the project is not.
This approach does assume that money to invest is not in short supply and there
are no alternative projects. If other projects are candidates for investment then
the NPV of each should be compared and consideration made of which individual
or combination of projects would provide the best return.
However, in the context of your single, unique FTTH-based project, the NPV
provides a good reference value for different scenarios. Investors and bankers are
likely to ask for sensitivity analyses that reflect what may happen in the business,
e.g. subscriber take up is 10 percent lower than expected. The NPV of this new
scenario compared to the original will then show if this change in prospects for the
business is serious or not.
Internal rate of return
The Internal Rate of Return (IRR) is almost the reverse of the NPV process. It
represents the discount rate that would be applied to create a net present value of
zero. As stated previously, if the NPV is positive then in simple terms, the project
is worth considering and, if the NPV is negative, the project should be dropped, or
substantially changed. The point where the NPV becomes zero is an important.
In addition, if you can earn a particular return from an investment, then this can
be compared to the IRR of a project. A high-risk project with an IRR of only 6%
does not seem very attractive compared to putting money into a very safe
investment with a return of 5.5%.
The table below shows three different cash flows and their respective IRR:
YEAR
1 2 3 4 5 6 7
CASH FLOWS -10,000 2,000 2,500 2,500 3,000 3,000 3,500
IRR 15%
CASH FLOWS -10,000 2,500 2,500 3,000 3,500 3,500 3,500
IRR 19%
CASH FLOWS -10,000 3,000 3,500 3,500 5,000 5,000 5,000
IRR 30%
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