CASE 17 Exhibit TN1 (continued)

2. Analysis Project number Total life of investment Payback (years) Average ROI2 Net present value at: 10% 11% 12% 14% Internal rate of return PV index3 Equivalent annuity4 Equiv. annuity (to infinity) $73 (11) (90) $(234) $(85) (107) (129) $(170) $394 90 (173) $(599) $228 127 30 $(146) $130 13 (93) $(280) 0 $(18) (36) $(70) $165 132 99 $37 $183 51 (72) $(296) 1 8 7 20.7% 2 3 2 36.1% 3 15 15 33.3% 4 15 6 11.9% 5 15 8 14.0% 6 1 1 110.0% 7 5 2 25.6% 8 7 7 29.6%

10.9% 1.037 $13.7 $137.0

6.3% 0.957 $(34.4) $(343.6)

11.3% 1.197 $51.8 $517.9

12.3% 0.706 $30.0 $300.1

11.1% 1.065 $17.1 $170.5

10.0% 1.000 0 0

15.3% 1.083 $43.5 $435.4

11.4% 1.563 $37.59 $375.9

2 Average return on investment is calculated as the average of the cash flows over the life of the project divided by the $2,000 upfront investment. 3 The PV index is calculated as the present value of all inflows (at a 10% discount rate) divided by the present value of all outflows. Ordinarily, the PV index will rank projects identically to the standard NPV except where outflows occur in later years, as in projects 4 and 8; in those cases, the PV index changes the ranking significantly. 4 The equivalent annuity is that constant annual payment over the life of an investment that yields a present value (at discount rate, r, or 10% in this case) that is just equal to the net present value of the entire cash flow stream. The equivalent annuity is solved for by this equation:

This teaching note was written by Robert F. Bruner. The comments of Professors Kenneth Eades and Raghu Rau are gratefully acknowledged. Copyright 1989 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. Rev. 10/05.

Equivalent

PV (Cash flows) = Annuity n-year annuity present-value factor

where the n-year annuity present-value factor (the present value of an annuity of $1.00 per period for n periods, or PVF A) is 1. PVFA = r 1 (1 + r)n

Exhibit TN2 THE INVESTMENT DETECTIVE Graphic Comparison of Projects 7 and 8

$2,500 $2,000

Net Present Value (thousands)

$1,500 $1,000 $500 $0 ($500) ($1,000) ($1,500) Project 7 NPVs Project 8 NPVs 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%