From the course: Financial Modeling Foundations

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NPV decisions in financial models

NPV decisions in financial models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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NPV decisions in financial models

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- [Instructor] An alternative decision making criteria in financial modeling is NPV, or net present value. It's a bit less intuitive, but it has some critical advantages over IRR when making a major decision. Now, we've set up two decision criteria, IRR, internal rate of return, and NPV or net present value, and we pull each of these different metrics from different parts of our overall advanced valuation model. In particular net present value comes out of the DCF model combined with some data from the LBL portion of the model and IRR comes from the LBL portion of the model. Now, we can change the scenario that we're using. So if we use, as an example, scenario three for our growth, which is the Blue Sky case, we have a very high IRR, 36 percent, and our NPV is a positive 236.6 million dollars. The criteria for net present value, is shown here. If our net present value is bigger than zero, we should go ahead with the project. Net present value tells us the profit that we will generate…

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