Net Present Value

Question 1

NPV

Answer 1

Net Present Value.

The value that a decision brings to the company

Question 2

DCF

Answer 2

Discounted Cash Flow

Question 3

DCF Valuation

Answer 3

Estimate the expected future cash flows.
Estimate the required return for projects or investments of similar risk.
Find the present value of all the cash flows.

Question 4

NPV Decision Rule

Answer 4

If the NPV is positive, accept the project or decision.

A positive value will add value to the firm and increase the wealth of the firm.

Question 5

IRR

Answer 5

Internal Rate of Return.
Return that makes the NPV = 0.
Accept the project if the IRR is greater than the required return.
Most important alternative to NPV.

Question 6

NPV vs. IRR

Answer 6

Both will generally render the same decision.
Exceptions: Non-conventional cash flows or mutually exclusive projects.
Whenever there is a conflict between NPV and another decision rule, always use NPv.

Question 7

Mutually Exclusive Projects

Answer 7

If you choose one, you can’t choose the other.