Project Net Present Value.
Kicking up Dust
That’s what happens when you are terribly busy throwing time and resources at a project, but profits are only moving sideways or downwards; dust is flying like mad, but you’re going nowhere.
We often take on new projects with great gusto, firmly confident that, because we are massively busy and allocating funds and energy, it will be richly rewarded with a glorious bottom line. But more often than not, we are just kicking up dust.
Then it’s time to start using basic financial analysis before starting a project or accepting that contract.
Before you sign on the dotted line take the time to calculate the net present value (NPV) of the project or client by answering these three questions:
- What is your company’s cost of capital?
- What are your project’s cash flows?
- What is the project’s net present value?
Cost of Capital
Cost of capital the combined sum of your own money that you’ve invested in the company plus the amount you’ve borrowed.
This is how it is calculated:
Cost of Capital = (cost of debt x weight of debt)+(cost of equity x weight of equity)
Here you determine how much cash will come in to the business over the span of its lifetime, from start to finish.
But please don’t stop here. It might seem like you will be flush with cash at the end of the project, but you still need to take into consideration the project’s Net Present Value.
Net Present Value
The project’s NPV is determined by taking the total amount of cash expected to come in from the project, minus the company’s cost of capital. We discount each year’s profit back to its current value (year zero) to get the present value thereof.
The sum of these discounted amounts then make out the net present value.
Once you’ve made these calculations you will clearly be able to see if it is worth your while to take on that new project or client.
Now you can enjoy leaving others in your dust!