Assessing unconventional projects

[khwaja]

When it comes to some non conventional capital expenditure budgeting, I
find it little daunting to relate to Excel functions. To highlight my
predicament, please allow me to share following scenario with you:

In cases where you spend money to improve the business (in our case we
are planning to spend money to convert CAD files to new software),
there are no tangible cash in-flows associated. We have the option to
tender the project once to have the job completed at an investment cost
of $ 2.0 million. An alternative option is to have the project
completed in next 5 years (there is no urgency to convert all files) by
spending a uniform amount of money each year, say, $ 50,000. So again
there is an out-flow of cash costing us $ 2.5 million all up. I am
struggling to find the right method to evaluate these both options to
find the project with the better value.

How do you calculate options using Excel functions where no cash
inflows are expected?

Regards

AK

 

[Mike Middleton]

khwaja -

Please explain why this is a "predicament" for you. It looks to me like a
very straightforward use of net present value using Excel's NPV worksheet
function.

- Mike
www.mikemiddleton.com