53 Problem 2: Finding the NPV with Incremental Cash Flows. LLL is also considering two different commercial buildings (Warehouse or Tower) and wants to know how to choose the best one. Should LLL 54 calculate the IRR and NPV for each one and then choose? Lets analysize the incremental cash flow method, assuming a 10% cost of capital. 55 56 57 Cash Flow Projections: Project 'Delta 58 Project Warehouse Project Tower (Tower-Warehouse) 59 Year CF CF Incremental CF 60 0 ($15,000) ($35,000 61 1 $3,000 $9,000 62 2 $3,000 $9,000 63 3 $3,000 $9,000 64 4 $3,000 $9,000 65 5 $3,000 $3,500 66 6 $3,000 $3,500 67 7 $3,000 $3,500 68 8 $3,000 $3,500 70 IRR NPV 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 1 To find IRR: Enter =IRR(D60:D68) and IRR(F60:F68) for both projects. 2 To find NPV: Enter =NPV(0.1,D61:D68)+D60 for the Warehouse, and likewise for Tower (w/ F column) We use (+) NPV ( cost of capital at 10%, cash flows) + Initial Investment (a negative number) 3 Would you choose Warehouse or Tower if you rely on IRR? 4 Would you choose Warehouse or Tower if you rely on NPV? 5 We can see if it is advantageous to invest more initially in Tower by comparing the differences. This is looking at the incremental cash flows and finding the IRR and NPV of the differences, called Delta. For the Delta column, subtract Warehouse from Tower for each cash flow. 6 Find the IRR and the NPV for the Delta. Conclusion: The project Delta's NPV is positive, and the IRR is greater than the cost of capital. This confirms the choice of Tower over Warehouse. 53 Problem 2: Finding the NPV with Incremental Cash Flows. LLL is also considering two different commercial buildings (Warehouse or Tower) and wants to know how to choose the best one. Should LLL 54 calculate the IRR and NPV for each one and then choose? Lets analysize the incremental cash flow method, assuming a 10% cost of capital. 55 56 57 Cash Flow Projections: Project 'Delta 58 Project Warehouse Project Tower (Tower-Warehouse) 59 Year CF CF Incremental CF 60 0 ($15,000) ($35,000 61 1 $3,000 $9,000 62 2 $3,000 $9,000 63 3 $3,000 $9,000 64 4 $3,000 $9,000 65 5 $3,000 $3,500 66 6 $3,000 $3,500 67 7 $3,000 $3,500 68 8 $3,000 $3,500 70 IRR NPV 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 1 To find IRR: Enter =IRR(D60:D68) and IRR(F60:F68) for both projects. 2 To find NPV: Enter =NPV(0.1,D61:D68)+D60 for the Warehouse, and likewise for Tower (w/ F column) We use (+) NPV ( cost of capital at 10%, cash flows) + Initial Investment (a negative number) 3 Would you choose Warehouse or Tower if you rely on IRR? 4 Would you choose Warehouse or Tower if you rely on NPV? 5 We can see if it is advantageous to invest more initially in Tower by comparing the differences. This is looking at the incremental cash flows and finding the IRR and NPV of the differences, called Delta. For the Delta column, subtract Warehouse from Tower for each cash flow. 6 Find the IRR and the NPV for the Delta. Conclusion: The project Delta's NPV is positive, and the IRR is greater than the cost of capital. This confirms the choice of Tower over Warehouse