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Old 11-10-2017, 02:52 PM
phrazthatpaz phrazthatpaz is offline
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Join Date: Nov 2017
Posts: 1
Default NPV comparision help

Hey guys -

I'm having some trouble figuring out how to compare the cost of undertaking a new project that will increase future cash flows with doing nothing and keeping future cash flow unchanged.

Specifically, I have a duplex that I spent 5K on one side of and was able to raise rent on that unit by $175. That seems great, but I am now wondering if I should do the same on the other side or just let it be and continue to collect the lower rent.

Here are my numbers:

Project 1: Improve rental unit
Improvement cost: $5000
Old rent - $525
New rent - $700
Discount rate: 8%
Number of payments: 12

Project 2: Do not improve rental unit
Improvement cost: $0
Old rent - $525
New rent - $525
Discount rate: 8%
Number of payments: 12

What I was trying to do was use NPV to compare the two options. However, the option of 'do nothing' does not incur any cash outflows which is part of the NPV calculation.

I also thought of simply comparing the PV of both cash flows to see how the compare but I'm not sure that is correct either becuase it doesn't take into account the cash outflow of 5K on the improve option.

Clearly, more rent is good, but I feel like there has to be a correct way to mathmatically prove that out taking a new project on v/s keeping things status quo.

The other thing I was thinking I should do was not look at project 2 at all and just look at NPV of project 1. Any positive NPV on project one would indicate that I should undertake the project.

For all I know I am using the wrong metrics entirely.

Any guidance is appreciated.
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