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# PROJECT MANAGEMENT

Project Evaluation

CLASS ACTIVITY 6
For your particular project each group shall itemise the projects cost and evaluate the worth of the project using NPV method. The interest shall be at 10% Each group shall have 5 minutes to present its finding. Marks will be given based on the presentation

AIM OF EVALUATION
To determine whether the a project is economically viable

TOOLS OF EVALUATION
Net Present Value Method (NPV) Internal Rate of Return Method (IRR) Equivalent Uniform Annual Cost Method (EUAC) Cost Benefit Analysis Method (CBA)

## WHAT DOES NPV DO?

It calculate the value of the project at the time of evaluation

## WHAT DOES IRR DO?

It calculate the rate of return of the project

## WHAT DOES EUAC DO?

It calculate the equivalent uniform annual cost of the project.

## WHAT DOES CBA DO?

It calculate the benefit-over-cost ratio of the project.

## WHEN TO USE NPV?

To know the total worth of the project

## WHEN TO USE IRR?

To compare the rate of return of the project against some preferred rate

## WHEN TO USE EUAC?

When the investor is concern on the amount of money to be acquired/allocated annually/periodically to maintain the project.

## WHEN TO USE CBA?

When the evaluation requires the use of social interest rate

## WHAT IS SOCIAL INTEREST RATE?

Rates applicable to socioeconomic projects

## WHCH ONE IS SOCIOECONOMIC PROJECT?

Public investment project

## EXAMPLE OF PUBLIC INVESTMENT PROJECT?

Penang Bridge The Blue Mosque KLIA etc

## HOW TO PERFORM NPV? 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

## CALCULATING NPV 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 NPV Step 3

Convert A1 and A2 into its equivalent value at n = 0 i.e into another P value Discounting factor Where P = A(P/A/i/n)
Read the discounting factor from an interest table

Interest table

## CALCULATING NPV Step 4

Convert F into its equivalent value at n = 0 P = F(P/F/i/n)

## CALCULATING NPV Step 5

Add all P to give NPV, i.e NPV = -P0 A1(P/A/i/n) + A2(P/A/i/n) + F(P/F/i/n)

EXAMPLE
Initial cost = RM64,000.00 Salvage value = RM32,000.00 Yearly income = RM15,000.00 Year maintenance = RM3,200.00 Investment life = 5 yaers Interest rate = 10%

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

CALCULATING NPV
NPV = -P0 A1(P/A/i/n) + A2(P/A/i/n) + F(P/F/i/n) = -64,000 3200(3.7908) + 15000( 3.7908) + 32000(0.6209) = -64000 12130.56 + 56862.00 + 19868.8 = 600.24