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Economic analysis: Internal Rate of Return

Internal Rate of Return is the discount rate that will make the net present value of all cash outflows and inflows equal to zero. Found by iteration.

Year

0

1

2 3

4

CF

-1500

800

650 750

500

Factor

1

.91

.83 .75

.68

PV

-1500

+728

+540 +562

+340

IRR =

30.5%

Net Present Value

Figure 4

Figures

Net Profit after Taxes (NPAT) is the bottom line of an income statement . It might also be referred to as NI (net income). Many companies expect the project manager to work with the income statement, although others do not. Many experienced project managers do not understand financial statements, because this is an accounting concept rather than one which is necessarily integral to project management. It is quite possible to use the project costs into financial statements if desired, and using this statement the team can evaluate the profitability of the project. The financial statements that would be used would be an income statement, a balance sheet, and a cash-flow statement.

Checking/Savings

Checking-Bank One Checking-1st Nat'l Bank Petty Cash

Checking/Savings

Checking-Bank One Checking-1st Nat'l Bank Petty Cash

43617 5798 235

Total Checking/Savings

49650

Accounts Receivable

Accounts Receivable Receipts from Project Owners Accounts Receivable-Other Total Accounts Receivable

2000 250 2250 2250 51900

Total Accounts Receivable

Total Current Assets Fixed Assets

Project Equip

Equip - Other

Accumulated Depreciation

13202 -12009 1192 1192

Total Fixed Assets Other Assets

Investments

40784 126

Prepaid Expenses

Total Other Assets TOTAL ASSETS LIABILITIES & EQUITY

40909 94002

Liabiliti

Current Liabilities

Accounts Payable

Accounts Payable Total Accounts Payable Other Current Liabilities

Loans Payable Total Other Current Liabilities

2000 2000 2300 2300

Total Current Liabilities Total Liabilities Equit

Opening Bal Equity

69037 9618 13047 91702 94002

Retained Earnings

Net Income Total Equity

TOTAL LIABILITIES & EQUITY

A balance sheet shows the value of assets and the sources of funds for assets. When this is used for a project, it reflects the assets of the project. A balance sheet shows a financial position at a given point in time. An income statement summarizes the results of business operations over any given operating time period. Again, when this is applied to a project, we consider the project related finances during the period under consideration. The bottom line of the income statement is referred to as NPAT. A cashflow statement shows the sources and uses of cash over the timeframe covered on the income statement. When income is reduced by deducting certain revenue in order to reduce taxes, this cash recovered from the net income is adjusted by this amount. In other words, income statement expenses such as depreciation and amortization are added back to NPAT. Thus, there is a difference between NPV and NPAT. NPV includes depreciation as an expense, whereas NPAT does not include it.

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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