Calculation of investment project indicators with excel

To prepare an investment project you must go through the different stages: idea, pre-investment, investment and operation. In turn, the preinvestment stage involves following the successive steps of profile, prefeasibility and feasibility level studies.

To carry out an investment project, several technical studies are necessary: market, technical, organizational, legal and financial.

It is precisely in the latter where all the information obtained through the other studies is summarized, which serves to prepare cash flows on which the different indicators of their profitability will be calculated.

In this sense, Microsoft Excel allows the work to be carried out with many facilities. The methodology will be explained through the resolution of a practical case, which will consist of building cash flows and obtaining profitability indicators. Internal Rate of Return (IRR), Net Present Value (NPV), Recovery Period of the Investment (PRI) and Discounted Payback Period (Discounted PRI).

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Main Concepts

The Net Present Value arises from adding the updated cash flows of an investment project. It measures the wealth contributed by the project measured in currency from the initial moment. To update the cash flows, the discount rate is used. The decision rule is the next:
- Accept projects with NPV> 0 or Reject projects with NPV <0 It is not important to accept or reject projects with NPV = 0
Between two alternative projects, the one with the highest NPV should be selected. There is a single NPV for each project. It considers all the cash flows of the project. It considers the cash flows appropriately discounted. It measures the profitability in monetary terms.

TIR

They are all those rates that make the NPV = 0.Consider all the cash flows of the project.Consider the adequately discounted cash flows.The decision rule is as follows:

Accept projects with IRR r, where r is the previously defined cut rate.

There may be more than one IRR for each project, depending on the behavior of the fund flows. There will be a single IRR for a project when it is considered well behaved, that is, there is only one change of sign of the fund flows. profitability in percentage terms.

PRI

It is interpreted as the time required for the project to recover the invested capital. It measures the profitability in terms of time. It does not consider all the cash flows of the project, since it ignores those that occur after the investment recovery period. It does not allow hierarchical alternative projects. It does not consider adequately discounted cash flows. The decision rule is as follows:

o Accept projects with PRI

Discounted PRI