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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.

BUT WHY DIFFERENT TYPES?

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

Top part of the interest table

Top part of the 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