Week 6 - investment criteria and net present value Flashcards
1
Q
What does investment involve
A
Making an outlay of economic resources at one point in time which is expected to yield economic benefits at some point in the future
2
Q
Why are investment decisions important to business
A
- larger amounts of resources are involved
- it is often difficult to bail out of an investment once undertaken
3
Q
What must investment decisions be
A
Consistent with the objectives of the business (maximising the wealth of the owners)
4
Q
How can companies help their shareholders (NPV)
A
By investing in all projects with a positive NPV and rejecting ones with a negative NPV
5
Q
NPV =
A
PV (benefits) - PV (costs)
6
Q
Steps in choosing investment
A
- forecast cash flows
- determine the hurdle rate
- discount future cash flows
- go ahead if PV>investment
7
Q
What is net present value
A
A tool used to evaluate the profitability of an investment or project.
