Economic evaluation of the project (situational example to part number 1)

Hello dear friends.
This quasi-article is in addition to the previous article related to the evaluation of the effectiveness of an investment project (startup) and is a typical task of determining a more effective project and making an investment decision.

Situational example.

There are 2 investment projects that form cash flows, which are presented in the table, the required profitability of the investor is 10%. It is necessary to select the most effective one based on the evaluation results.

Project / Period	one	2	3
Project №1	-27,000	19,000	25,000
Project №2	-10000	4,000	9000

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To determine the effectiveness of projects we will use indicators with which we are already familiar: NPV and ID.

1. Calculate the NPV

Project №1

ChDD №1 = 19000 / (1 + 0.1) ^ 2 + 25000 / (1 + 0.1) ^ 3-27000 / (1 + 0.1) = $ 9939.9

Project №2

ChDD №2 = 4000 / (1 + 0.1) ^ 2 + 9000 / (1 + 0.1) ^ 3-10000 / (1 + 0.1) = $ 976.71

You should not make premature conclusions regarding efficiency, in fact in this case it is impossible to draw a conclusion based on the NPV, since projects require different amounts of initial investments, which means we have a different comparison base. To compare projects, it is necessary to use a relative indicator - the yield index.

2. Calculate the ID

Project №1

ID №1 = 9939.9 / (27000 / (1 + 0.1)) = 0.405 or 40.5%

Project №2

ID number 2 = 976.71 / (10,000 / (1 + 0.1)) = 0.107 or 10.7%

Conclusion:

Now we can definitely conclude that the first project is more preferable for the investor.

PS The task is invented from the head, in fact, these projects do not exist.
PPS If you have questions / comments / suggestions - do not hesitate to write in the comments, lichku.