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FINE 2000:Chapter 9 Net Present Value and Other Investment Criteria9.1 Net Present ValueBasic Idea-Investment is worth undertaking if it creates value for its ownersoWorth more in the marketplace than its cost to acquire-Capital budgeting:trying to determine whether proposed investment or project will be worth more than it costs once it is in place-Net Present Value:difference between an investment’s market value and its cost oEx. Market value of a home is 100,000 and the cost to purchase and renovate it is 90,000, then 10,000 is your NPVoHow much value is added today by undertaking an investment oGoal is to search for positive NPV projectsEstimating Net Present Value-If there is no marketplace to compare to (e.g. housing market), we must estimate NPV by estimating the future cash flows that we expect the new business to produceoNPV is the difference between the PV of the future cash flows and the cost of the investment -$6,000 in net cash flows for 8 years, lump sum of $2,000 at the end of 8 years-What is the Present Value?ooWhat is the Net Present Value? NPV = Investment market Value – Cost paidNPV =– 27,578 + 30,000 = -2422NOT A GOOD INVESTMENT-Net Present Value rule:an investment should be accepted if the NPV is positive and rejected if it negative -NPV figure itself tells us how much value will be created with the investment9.2 The Payback Rule (shitty)-Payback Period (accounting breakeven):