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NEW NPV CALCULATION BY NPV DRIVERS – ��VOLUME, PRICING, & COST��FEA VIRTUAL CONFERENCE�SEPTEMBER 23, 2021��CRIS HANSON, CHANSON@COFO.EDU

NPV can be more than magnitude.

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With Limited Capital, How to Allocate Funds?

  • Project A – NPV $A
  • Project B – NPV $B
  • Project C – NPV $C
  • Project D – NPV $D
  • Project E – NPV $E

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Which projects should be funded?

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How do I compare NPV’s?

Strategic?

Largest NPV?

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NPV�Dilemma�

  • How can NPV be compared across projects?
    • Can NPV be more than just magnitude?
  • What is the project promising?

New Product Pricing? Volume? Cost?

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One project has a continuation of original product volume

Another project assumes that the original product will never be sold again?

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Goal: Mathematically rearrange the NPV calculation into a new NPV calculation of volume, pricing, and cost components enabling improved management decision making.

NPV�Dilemma�

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Derivation�Inspiration�

  • Probably something from my engineering background

Thoughts on teaching – focus on application (simple) and not the calculation derivation

While derivation attached, PowerPoint is focused more on application.

  • Calculation rearrangement into financial drivers
    • change in volume,
    • change in pricing, and
    • change in cost.
  • Similar in concept to engineering drivers such as:
    • thermodynamics�– change in temperature
    • fluid flow�– change in pressure
    • chemical reactions�– change in concentrations
    • electrical�– voltage drop

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Variable Definitions��Please Take A Screenshot As We Quickly Pass Over This Slide�

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Before – Conventional NPV

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After – New NPV

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NPV Now Chunked Into Contributing Elements

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Simple�Excel�Example��Traditional�NPV

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Simple�Excel�Example��Hanson�NPV

Hanson NPV

= Traditional NPV

Opportunity!

Management (How to analyze):

-establish per unit rates?

-establish baseline values across all projects?

-graph impact of change?

-sensitivity analysis?

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Questions?

Note that backup slides contain a multiple product example as well as the calculation derivation.

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Backup

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Multiple Product Example

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Multiple�Product�Example�(1/3)

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Multiple�Product�Example�(2/3)

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Multiple�Product�Example�(3/3)

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Calculation Derivation

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Derivation�(1 of 6)

Equation 3? What?

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Derivation�(2 of 6)

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Derivation�(3 of 6)

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Derivation�(4 of 6)

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Derivation�(5 of 6)

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Derivation�(6 of 6)