Chapter 5 lecture

# 5 year 1 2 3 4 5 cash flow 10000 15000 15000 20000

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: OTE: Does not really calculate the Net Present Value, NOTE: but rather the Present Value but – Inputs: Series & the discount rate – Example: • What is the PV of the following series @ 7.5%? Year 1 2 3 4 5 Cash Flow \$ 100.00 \$ 150.00 \$ 150.00 \$ 200.00 \$ 200.00 17 The NPV Function – We can use either the long way of summing up PVs We or the NPV function or • Note that the PV function can only deal with annuities 18 Example on NPV Example • • • Reference (Example): Reference File: Pfe_chap05.xls Worksheet: “page 92” 19 Net Present Value • NPV = PV(CF) – Inv. – Can be viewed as a cost-benefit analysis • Benefits = PV of expected cash flows • Cost = Initial investment • Note that as always, only cash flows that are Note stated in the same time period can be compared against each other compared 20 NPV – simple example • Consider a project with following Consider expected cash flows: expected – Year 0: -\$1,000 – Year 1: \$300 – Year 2: \$350 – Year 3: \$450 • If your opportunity cost of capital is 5%, If is this a worthwhile project? is 21 NPV – simple example \$300 \$350 \$450 + + 1...
View Full Document

## This document was uploaded on 02/09/2014.

Ask a homework question - tutors are online