Slide:2Section 16.1: IntroductionSection 16.2: Discounted Cash Flow (DCF)Section 16.2: Net Present Value (NPV)Section 16.3: Internal Rate of Return (IRR)TopicsSection 14.1
Slide:3Section 14.3Investments are expenditures with determinable future benefits.Net Present ValueThe concept of net present valuecan be thought of as an extension to discounted cash flow.DCF is used to calculate NPV.Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of all cash outflows.$4000$80002 years1PVCash InflowsPVCash Outflows = $10,000NPV =PVCash Inflows–PVCash OutflowsThen we can use this formula to calculate NPV.Consider this example, where an initial investment (outflow) of $10,000 later earns (inflows) $4000 and $8000. We use DCFto find the PVsof cash flows.
Slide:4Section 14.3Strawberry Inc. is evaluating a project which will require a $100,000 investment in R&D. Based on their analysis, the project will generate future cash flows of $20,000 one year from now, $40,000 two years from now, $60,000 three years from now, and $30,000 four years from now. Given that the company requires a 12% rate of return on all of their investments, should they go ahead with this project?a. Yesb. No