NPV calculation with changes - Shortcuts?

CFA Level II
#1

Hi all, When in a question, they ask us to calculate the difference in NPV e.g if the initial outlay increases by X amount, I basically calculate the NPV in both cases and do the difference… Is there any other way to do this quickly? Thanks! S

#2

The difference would be the increase in the initial outlay. For example (hope this is the same type of question you are looking at):

Y0 -10000

Y1 20000

Y2 20000

NPV = -10000+20000/(1+r)+20000/(1+r)^2

If now the initial outlay is -15000 instead of -10000,

NPV = -15000+20000/(1+r)+20000/(1+r)^2

Then take the 1st equation subtract the 2nd, gives you 5000 difference. This would be significantly faster.

If they asked to compare NPV of 2 projects with difference cash flows, just simply find the NPV of the difference in cashflow. If the result is +, then NPVa > NPVb, otherwise NPVa < NPVb. However, I think it would just 10-15s faster than the usual method.

#3

I’d rather practice on my BAII to enter NPV inputs at lightning speeds. I mean the marginal time spent on doing this question twice is, in my opinion, negligible.

#4

Jack,

There could be other examples, but in the one you specified; the answer provided is wrong.

Remeber than the initial outlay (FC) is also impacting in the depreciation used in the subsequents CF.

Krokodilz,

Yeah I think that is the only possible option

Thanks

S