PED guidebook main sxn rev6. FINAL.pdf - LGRC DILG 10

Project Evaluation and Development12. Net present value (NPV). The stream of benefits and costs can be expressed in presentvalue terms. The net present value (NPV) is the difference between the present value ofbenefits and the present value of costs.B CtNPV = −t(1+ r) (1+r)TTt∑ t ∑t= 0 t=0where B t and C t are the benefits and costs accruing at time t, respectively.The decision rule is to reject a project thatyields a negative NPV.YearExample (d) : Consider the previous example (c). Let us assume that the projectentails an investment cost of P 150,000 and all these are spent on year 0.Undiscountedamount0 150,000 01Cost Revenues Revenuesless CostFormula Discounted Undiscounted Formula Discountedamount amountamount150,000(1 + 0.15)150,000 (150,000)2 100,000100,0002(1 + 0.15)3 100,000100,0003(1 + 0.15)4 100,000100,0004(1 + 0.15)5 100,000100,0005(1 + 0.15)75,614.37 75,614.3765,751.62 65,751.6257,175.32 57,175.3249,717.67 49,717.67T O T A L 248,258.99 98,258.99The net present value (NPV) is computed to be P 98,258.99. Since the NPV is positive,we conclude that the project is viable.13. Rate of return, or financial rate of return, is the ratio of the earnings from the asset to thevalue of that asset. For public projects, we normally do not compute for the financial rateof return since these are not expected to yield profits.14. Internal rate of return (IRR) is the discount rate at which the net present value is zero.RGEdillon January 20068