Chapter 5 lecture

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

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

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