Chapter+08 - 1 Net Present Value 2 Net Present Value...

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1 Net Present Value Net Present Value - Present value of cash flows minus initial investments. Opportunity Cost of Capital - Expected rate of return given up by investing in a project 2 Net Present Value Example Q: Suppose we can invest $50 today & receive $60 later today. What is our increase in value? Initial Investment Added Value $50 $10 A: Profit = - $50 + $60 = $10 3 Net Present Value Example Suppose we can invest $50 today and receive $60 in one year. How much better is this than an acceptable level of 10%? This is the definition of NPV Profit = -50 + 60 1.10 $4.55 Initial Investment Added Value $50 $4.55 4 Net Present Value Net Present Value Rule Managers increase shareholders’ wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with a positive net present value. Accepting this project will add __ to the value of our company. 5
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Chapter+08 - 1 Net Present Value 2 Net Present Value...

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