Investopediacomvideo netpresentvaluenpv

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Unformatted text preview: ill accept the project if it pays back on a discounted basis in 2 years. Do we accept or reject the project? Net Present Value (NPV) Net Present Value (NPV) The difference between the market value of a project and its cost. Sum of the PVs of all cash inflows and outflows of a project: CF t NPV ∑ = t t =0 ( 1 + k ) n Net Present Value (NPV) Net Present Value (NPV) Source: http://www.investopedia.com/video/ Net Present Value (NPV) Net Present Value (NPV) How much value is created from undertaking an investment? The first step is to estimate the expected future cash flows. The second step is to estimate the required return for projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment. NPV – Decision Rule NPV – Decision Rule If the NPV is positive, accept the project A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners. Since our goal is to increase owner wealth, NPV is a direct measure of how well this project wi...
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