# Steps to calculate the npv of the investment identify

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steps to calculate the NPV of the investment: Identify the amount and timing of the cash flows required over the life of the investment. Establish an appropriate interest rate to be used for evaluating the investment, typically called the required rate of return. (This rate is also called the discount rate or hurdle rate.) Calculate and evaluate the NPV of the investment. If NPV > 0 then accept the project.
15 Net Present Value Net present value (NPV) formula for an initial investment is: where N = number of time periods t = time of the cash flow Rt = the net cash flow (i.e. cash inflow – cash outflow, at time t.) r = discount rate = initial investment
16 Net Present Value Net present value (NPV) formula for projects generating revenue at varying rates over time is: where N = number of time periods t = time of the cash flow Rt = the net cash flow (i.e. cash inflow – cash outflow, at time t.) i = discount rate = initial investment
17 Internal Rate of Return (IRR) Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does (Investopedia, 2018). When calculating IRR, expected cash flows for a project or investment are given, and the NPV equals zero. The initial cash investment for the beginning period will be equal to the present value of the future cash flows of that investment (cost paid = present value of future cash flows. Hence, the net present value = 0). Use IRR Excel Function
18 NPV or IRR In capital budgeting, senior leaders would like to know the returns on these investments, and the internal rate of return is one method that allows them to compare and rank projects based on their projected yield, and the one with the highest internal rate of return is usually preferred (Corporate Finance Institute, 2018). Using NPV also works better when a project’s discount rate is not known. The IRR has to be compared to the discount rate to gauge a project’s feasibility. If the IRR is higher than the discount rate, it’s a good project to pursue. If a project’s NPV is above zero, it’s financially worthwhile (Investopedia, 2018).
Step 3: Discuss Capital Budgeting Capital Budgeting Discussion
20 Capital Budgeting Capital budgeting is the process in which a business determines and evaluates potential large expenses or investments. These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often, a company assesses a prospective project's lifetime cash inflows