BSB107 Chap.10 Evaluating Business Investments with NPV and IRR
Evaluating Business Investments with NPV and IRR
Cash flows, discounted
Module 2 evaluates business investments on their cash flows.
Each future flow is discounted to today and the results are added, outlay included, to give the net present value; the internal rate of return is the discount rate that makes that sum zero.
Excel's tools
The unit's guide computes NPV by hand and with the NPV function plus the initial outlay, finds IRR with the IRR function or with Solver, and uses Goal Seek to work backwards from a target such as a profit margin.
Where this sits in Module 2
Module 2 opens with business financial statements and how to evaluate financial information, then covers break-even and profitability in Week 10 and evaluating investments in Week 11, before ending with the social and ethical impact of business finance.
This chapter covers the investment and target-profit tools; the time value of money from Topic 4 is the foundation for all of them.
Ethical questions return at the end of the module, when the unit asks how far businesses carry social responsibilities beyond the numbers.
What this chapter covers
- 01
Why undiscounted cash flows mislead
- 02
Discounting each cash flow
- 03
NPV by hand and with the NPV function
- 04
IRR and the NPV profile
- 05
Solver, XNPV and XIRR
- 06
Goal Seek for a target profit
Worked example · free
The van project at a 10% discount rate
- +1Discount each inflow: 15,000 ÷ 1.1 = 13,636.36; 18,000 ÷ 1.1² = 14,876.03.
- +120,000 ÷ 1.1³ = 15,026.30; 12,000 ÷ 1.1⁴ = 8,196.16.
- +1Present value of inflows = $51,734.85.
- +1NPV = 51,734.85 − 50,000 = $1,734.85; =NPV(0.1, B2:E2) + A2 agrees.
Key terms
- Discount rate
- The rate used to convert future cash flows into today's dollars in a present value calculation.
- NPV profile
- A chart of a project's net present value against a range of discount rates, crossing zero at the IRR.
- XNPV
- An Excel function that calculates net present value for cash flows on specific, possibly irregular, dates.
- Solver
- An Excel add-in that changes chosen cells until a target cell reaches a set value, such as an NPV of zero.
Evaluating Business Investments with NPV and IRR FAQ
Why can I not just add up a project's cash flows?
Because the inflows arrive in later years and a future dollar is worth less than a dollar today. Adding them treats every year alike and overstates the project; discounting each flow first gives the true comparison with the outlay.
What does an IRR of 11.6% tell me?
It is the discount rate at which the project's net present value is exactly zero. If you discount at a lower rate the NPV is positive, and at a higher rate it is negative, which the NPV profile shows as the point where the curve crosses zero.
How does Goal Seek help with a target profit?
Set the profit or margin cell to the target value by changing an input such as the selling price, and Excel finds the input that produces the target. It is the same idea as solving the equation backwards by hand.
Why does Excel's NPV function need the outlay added separately?
The function treats the first value in its range as arriving one period from now. The unit's guide therefore applies NPV to the flows from Year 1 onwards and adds the Year 0 outlay afterwards, as in =NPV(B4, C5:F5) + C4.
When would I use XNPV and XIRR?
Use them when cash flows arrive on irregular dates rather than at even yearly intervals. Each takes a range of cash flows and a matching range of dates, and discounts using the exact number of days between them.
Is a project with a positive NPV always the better choice?
A positive NPV shows the discounted inflows exceed the outlay at the chosen rate, but the answer depends on that rate. The NPV profile shows how quickly the figure falls as the rate rises, so compare projects at the rate that matters to the business.
Exam move
Evaluate one project manually with discount factors, repeat it using NPV plus the Year 0 outlay and IRR, and reconcile both. Plot its NPV profile once so the zero crossing becomes familiar, and set up a Goal Seek target-profit problem whose answer you confirm algebraically.
Working through Evaluating Business Investments with NPV and IRR in BSB107? Sia is AskSia’s AI Finance tutor — ask any BSB107 Evaluating Business Investments with NPV and IRR question and get a clear, step-by-step explanation grounded in how BSB107 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
