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
The difference would be the increase in the initial outlay. For example (hope this is the same type of question you are looking at):
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.
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.
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.
Yeah I think that is the only possible option