PROJECT MANAGEMENT

Project Evaluation EUAC & IRR Methods

CLASS ACTIVITY 7
Each group calculate their EUAC and IRR and compare them with NPV

PERFORMING UEAC Step 1

Determine P, F, A, i, n
P0 = initial cost F = +ve or ve discrete payment A = uniform periodical payment i = interest rate n = project life

PERFORMING UEAC Step 2

Put P, F, A, I and n on a cashflow diagram
C/flow F A2 i = x% per year n 0 P0 1 2 A1 3 4 5 10

CALCULATING EUAC Step 3

If A1 and A2 do not start from n=1, convert them to an equivalent P at n=0 To convert to P, use P=A(P/A/i/n) To bring to n=0, use P=F(P/F/i/n)

CALCULATING EUAC Step 4

Then distribute them as A To convert to P, use P=A(P/A/i/n) To bring to n=0, use P=F(P/F/i/n) To distribute back as A, use A=P(A/P/i/n)

Example
C/flow ii i iii F A2 i = x% per year n 0 P0 i. 1 2 A1 watch out ! 3 4 5 10

Convert to a P by P=A2(P/A/i/4)

ii. Convert to P at n=0 by P=A2(P/A/i/4)(P/F/i/1) iii. Convert (P-P0) to A by A=[A2(P/A/i/4)(P/F/i/1)-P0](A/P/i/5)

CALCULATING EUAC Step 5

Distribute F into its equivalent A value using A = F(A/F/i/n)

CALCULATING NPV Step 6

Add all A to give EUAC, i.e EUAC = [A2(P/A/i/4)(P/F/i/1)-P0](A/P/i/5) + F(A/F/i/n) A1

EUAC FOR CAR PURCHASE EXAMPLE

C/flow 32K 15K n 0 64K 1 2 3 3.2K 4 5 10 i = 10% per year

EUAC

=(15000-3200)+32000(A/F/10%/5)-64000(A/P/10%/5) = (11800)+32000(0.1638)-64000(0.2633) = 190.4

PERFORMING IRR Step 1

Determine P, F, A, i, n
P0 = initial cost F = +ve or ve discrete payment A = uniform periodical payment i = NOT KNOWN! n = project life

PERFORMING IRR Step 2

Put P, F, A, I and n on a cashflow diagram
C/flow F A2 n 0 P0 1 2 A1 3 4 5 10

CALCULATING NPV Step 3

Calculate NPV using NPV = -P0 A1(P/A/i/n) + A2(P/A/i/n)+ F(P/F/i/n)

CALCULATING NPV Step 4

Assume one value of i between 0 10% and calculate NPV

CALCULATING NPV Step 5

Assume another i so that NPV obtained change sign from +ve to ve, vice versa.

CALCULATING NPV Step 6

Plot these on NPV vs i graph
NPV this is IRR, i.e when NPV = 0

assumed i

IRR FOR CAR PURCHASE EXAMPLE

C/flow 32K 15K n 0 64K 1 2 3 3.2K 4 5 10 i = 10% per year

NPV = -P0 A1(P/A/i/n) + A2(P/A/i/n) + F(P/F/i/n) When i=10% NPV = -64,000 3200(3.7908) + 15000( 3.7908) + 32000(0.6209) = 600.24 (i.e NPV = +ve) When i=18% NPV = -64,000 3200(3.127) + 15000(3.127) + 32000(0.4371) = -13114.2 Interpolating, %/NPV = 8(600.24+13114.2) = 0.000583320 to get NPV = 0, NPV = 600.24 % = 0.000583320 X 600.24 = 0.35% IRR = 10% + 0.35% = 10.35%

GRAPH OF NPV vs i
Plot these on NPV vs i graph
NPV (10%, 600.24) i

this is IRR = , i.e when NPV = 0