Now, again, we have to help John with his investment choice.
He has two options and the first option, he can buy a car for ten thousand dollars.
Which will give him around two thousand dollars for the next five years and at the end of fifth year,
he can sell that car for four thousand dollars.
Now, the second investment opportunity is that he can invest eight thousand dollars today and at the
end of sixth year he will be getting the development or sixteen thousand dollars for his investment.
Now, to find out which option is better, we will use both Ayata and MPV to evaluate these options.
So I have listed a few of the important parameters here, the principal amount or be an option one is
10000.
Are our discount rate is zero point zero six or six percent.
And the salvage value in option one is four thousand dollars, salvage values means this is the amount
he will receive after the end of the investment term.
And option B, the B or principal amount is eight thousand dollars.
The discount rate is the same, which is six percent and the salvage value is zero, at the end of this
investment term, he will get sixteen thousand dollars.
But unlike God, there is no option to sell any asset for any further cash or value.
Now, let's first calculate the IRR for option one.
So to calculate error, we have to include the initial investment in the formula as well.
So for the 08 year or for the starting of last year, John is investing ten thousand dollars in option
one.
So I will write minus ten thousand.
In the other one, he will get 2000.
Now, for the next five year, he will get 2000.
And for the last year, he will get 2000 plus an additional 4000 for selling the car.
So in total, at the end of the year, he will get six totaling.
Now, to calculate accurate.
We have to just straight equal to Iara.
Now, if you want help with this formula, you can click on this button Oriya, which will give you
some more details about the parameters we have to use.
So for values, we can just select all the cash transactions we have listed over here, so at the Zero
Theater we are investing 10000 and we are getting this cash inflow for the next two years.
So just select all the values and enter.
In some cases, there may be two or more error rates for which we have to use this gas variable, but
in this case there is only one error rate which is possible.
So we will ignore the gas parameter.
But for some complex transactions in which we have some initial investment and then some other investment
down the road, in those cases we can have multiple layers and we have to use this gas.
What even.
But for most of the transactions, you can ignore this parameter.
So just select all the values and make.
So this is Diora value.
Ayata for option one is 10 percent.
Now, let's calculate the accurate value for our option B.
And option B as well, our initial investment is eight thousand.
All right, minus eight thousand minus means investment.
And then for the next five years, we are not getting anything.
So this will be zero and the sixth year we are getting 16000.
Again, to calculate IRR, we can use equal to accurate.
And then select all this cash flows.
If we had enter.
We are getting Ayata for our option B.
S 12 percent.
So just by comparing error, you can see that we are getting higher return on our option B.
We can also calculate the NPV of both of these options for NPV.
We do not include.
The initial investment sought to calculate we cannot equal to NPV.
Then first, the rate is zero point zero six and then the values.
Here we are not selecting minus 10000 because this was the investment at the start for Ayata.
We have to select our investment at the site for NPV.
We don't have to select investment.
So the NPB in this case is around eleven thousand four hundred and thirteen dollar.
Now, similarly, we can calculate the NPV for option B as well, we just have to write and bevvy.
And then we have to select all the cash flows.
From first to sixth year.
So the NPV in our option B is eleven thousand two hundred and seventy nine.
Now, remember an option when we invest 10000.
And we are getting around eleven thousand four hundred and thirteen an option B, we invested only eight
thousand and we are getting almost identical amount.
That is eleven thousand two hundred and seventy nine.
You can also subtract this investment from this net present value to see how profitable these options
are.
So the rate equal to this minus the present value of our investment, that is tantalising.
And it is coming to be fourteen hundred and thirteen dollars.
For option to Israel.
We are getting around three thousand two hundred and seventy nine.
So clearly, you can see that the net value we are getting from option B is much more than the net value
we are getting from option A..
So from both the methods by comparing error and by comparing and NPV, we can say that Option B is much
better than option A.
So in this way, you can evaluate multiple investment options, IRR, and we both will tell you which
one is better investment for you.