3.8 HL

Question 1

what is the net present value?

Answer 1

Present value is today’s value of an amount of money available in the future. It is the difference between the present valueof cash inflows and thepresent valueof cash outflows.

Question 2

you use the discount cash flow method to find the net present value, what is this?

Answer 2

is a technique that considers how interest rates AND inflation affect the present value of future cash flows.

Question 3

what do you need to calculate the. discount cash flow method?

Answer 3

To use this method we need to use a “discount factor” to convert the future net cash flow to its present value today.

Question 4

what are the two things the discount factor represent?

Answer 4

“discount factor” can represent either interest rate or inflation.

Question 5

how do you analyse a project using a net preset value?

Answer 5

a positive value that means that the project should go ahead and its viable.
Of course, if the value was negative, the project shouldn’t be pursued.

Question 6

This is a weird unit, you may want to look at the example questions on the power point.

Answer 6

This is a weird unit, you may want to look at the example questions on the power point.

Question 7

when is net present value used?

Answer 7

NPVis used in capital budgeting to analyse the profitability of a projected investment or project.

Question 8

when alanising your results how can you see if the value of money has increased or decreased? this is worth knowing as an analysis point.

Answer 8

you look at the sum of all money before timing by discount then after.