finance lec 3 - net present value Flashcards
what is netpresent value
sum of present value for all cf assocaited w project
what have you got do with all relevant cashflows
discount them
net presnt value equation
presemt value of al cash flows
+ve and -ve
present value of inflows - present value of intial cost
what is conventional cashflow
pay out initially a negative cashflow then start recieveing stream of +ve cf
+ve net present value means
in terms of net position you’re better off
you created value - so it is worthwhile
recived more than you paid
-ve NPV
Paying more tha nyou getting
destroying value so dont take it on - better off not creatin any value
NPV gives us net position in terms of
profitablity
discount rate ajkja
required ROR for comp
cost of capital
target ROR
Discount rate will always be given to us T/F
T
Decision rule
+ve NPV good as creating value
if dont got shortage of funds can invest in whatev project you wnt
accept project with hihgest NPV
NON SATIATION ASUMPTION
if something is good we want more of it
Residual value
value of investment at teh end of the project
if get resdual value on last year what must we do
add it to the cf amount
3 +ve of NPV
takes into account itme value of momey
takes into acc size of I
- return net absolute value allowing for comparison
takes into account duration of I period
-giving us a more full and comprehensive view
4 -ve of NPV
Difficult to understand if not in inannce
difficult ot estimate cf
difficult to dt discount rrate
by itself it is insufficient
doesnt take into accoun the investment amount
