NPV & IRR Flashcards
What is NPV?
)Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present., and it represents the positive and negative future cash flows throughout a project’s life cycle discounted today. NPV represents an intrinsic appraisal, and it’s applicable in accounting and finance where it is used to determine investment security, assess new ventures, value a business, or find ways to effect a cost reduction.
What is IRR?
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment. is a form of metric applicable in capital budgeting
Capital budgeting refers to the decision-making process that companies follow with regard to which capital-intensive projects they should pursue. Such capital-intensive projects could be anything from opening a new factory to a significant workforce expansion, entering a new market, or the research and development of new products.. It is used to estimate the profitability of a probable business venture. The metric works as a discounting rate that equates NPV of cash flows to zero.
Cost of capital Definition
Cost of capital is the minimum rate of return that a business must earn before generating value. Before a business can turn a profit, it must at least generate sufficient income to cover the cost of funding its operation.
Discount Rate Definition
Discount Rate In corporate finance, a discount rate is the rate of return used to discount future cash flows back to their present value. This rate is often a company’s Weighted Average Cost of Capital (WACC), required rate of return, or the hurdle rate that investors expect to earn relative to the risk of the investment.
Hurdle Rate Definition
A hurdle rate, which is also known as minimum acceptable rate of return (MARR), is the minimum required rate of return or target rate that investors are expecting to receive on an investment. The rate is determined by assessing the cost of capital, risks involved, current opportunities in business expansion, rates of return for similar
