From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
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Spreadsheet analysis: Analyzing cash flows by item and year
From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
Spreadsheet analysis: Analyzing cash flows by item and year
- In using a spreadsheet to compute NPV and IRR, you can use an item by item structure or a yearly cash flow structure. So far, we've used an item by item structure. In a spreadsheet, the computation of the Lilly Company Machine, NPV, using an item by item structure looks like this. The interest rate is 10%, the length of the project is five years, and the NPV, the net present value, $57,841. Now note, because of rounding, the displayed values for the individual items do not exactly add up to the total. Now, the benefit of this type of display is that the contribution of each item is made clear. For example, with this display, it can be seen that the $10,000 salvage value with a present value of $6,209 is not essential to the attractiveness of this machine. Even if the machine has a salvage value of zero, the machine's NPV will still be greater than zero. Now, an alternative way to do the calculation is to compute the…
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