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23 Corporate Finance The net present value investment rule 4. The net present value investment rule
Net present value is the difference between a project's value and its costs. The net present value
investment rule states that firms should only invest in projects with positive net present value.
When calculating the net present value of a project the appropriate discount rate is the opportunity cost of
capital, which is the rate of return demanded by investors for an equally risky project. Thus, the net
present value rule recognizes the time value of money principle.
To find the net present value of a project involves several steps:
How to find the net present value of a project
1. Forecast cash flows
2. Determinate the appropriate opportunity cost of capital,...
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