Zenith case Flashcards
What is NPV?
Net Present Value (NPV) is a financial metric used to assess the profitability of an investment or project by calculating the difference between the present value of cash inflows and the present value of cash outflows over time.
NPV is one of the financial metrics used to determine the acceptability of an investment.
Draw the formel of NPV
Components of the NPV
The initial investment into the project.
Period: Duration of investment
Cash flow: How much they want to invest annually
Discount rate: Could be Interest rate or Required Rate of Return.
The Required Rate of Return is the minimum rate of return that an investor expects to earn from an investment. E.g. the bank expect an RRR from their investment in a business.
An interest rate is the cost of borrowing money, or the return earned on savings or investment, expressed as a percentage of the principal.
How do companies know when an investment is acceptable using NPV?
NPV ≥ 0 => the investment is acceptable,
If NPV = 0, the project is financially neutral.
It can be acceptable if no better investment opportunities exist or if the project provides strategic value.
NPV < 0 => the investment is not acceptable
The project will loose money
What is IRR?
IRR stands for Internal Rate of Return, a financial metric used to evaluate the profitability of an investment or project. It is the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) from the investment equals zero
The IRR is expressed as a percentage and represents the annualized rate of return an investment is expected to generate.
A project is typically considered acceptable if its IRR is higher than the required rate of return (or hurdle rate).
Decision Rule:
If 𝐼𝑅𝑅>RequiredRateofReturn Accept the project.
If 𝐼𝑅𝑅<RequiredRateofReturn
Reject the project
What is ROI?
ROI stands for Return on Investment, a simple way to measure how much money you make (or lose) on an investment compared to how much you put in. It’s usually shown as a percentage, so it’s easy to compare different investments
