Business Investment Decisions_NPV_Ch 16.1 & 16.2 (1)x - Net Present Net Present Value Value Slide:1 Section 14.1 Topics Section 16.1

# Business Investment Decisions_NPV_Ch 16.1 & 16.2 (1)x -...

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Slide:1 Net Present Value Net Present Value
Slide:2 Section 16.1: Introduction Section 16.2: Discounted Cash Flow (DCF) Section 16.2: Net Present Value (NPV) Section 16.3: Internal Rate of Return (IRR) Topics Section 14.1
Slide:3 Section 14.3 Investments are expenditures with determinable future benefits. Net Present Value The concept of net present value can 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 \$8000 2 years 1 PV Cash Inflows PV Cash Outflows = \$10,000 NPV = PV Cash Inflows PV Cash Outflows Then 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 DCF to find the PVs of 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
Slide:5 \$31,887.76 Solution N I/Y P/Y C/Y PV FV 1 12 1 17857.14286 20000 1 Year 1: Year 1: N I/Y P/Y C/Y PV FV 2 12 1 31887.7551 40000 1 Year 2: Year 2: N I/Y P/Y C/Y PV FV 3 12 1 42706.81487 60000 1 Year 3: Year 3: \$17,857.14 PV Cash Inflows \$42,706.81 N I/Y P/Y C/Y PV FV 4 12 1 19065.54235 30000 1 Year 4:
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