NPV is used to evaluate the financial return from a potential captial investment allowing for the time value of money. Future values are discounted to present values.
1 of 8
How do you calculate the present value?
forecast cash flow(discount rate +1)-the year
2 of 8
How do you calculate the net present value?
Add up all of the present values
3 of 8
What does it mean if the net present value is negative?
The project does not provide a positive return and therefore is not a worthwhile investmen.
4 of 8
What does it mean if the net present value is positive?
This shows that it is a worthwhile investment.
5 of 8
How do you calculate the discount rate?
the % put into decimals +1
6 of 8
What assumptions does the NPV make?
Assumes a fixed discounted rate. NPV dosent take into account any risk assessments.
7 of 8
What does the internal rate of return mean?
The discount rate at which the NPV equals 0. if the IRR exceeds a firms required rate of return the investment is desirable.
8 of 8
Other cards in this set
Card 2
Front
How do you calculate the present value?
Back
forecast cash flow(discount rate +1)-the year
Card 3
Front
How do you calculate the net present value?
Back
Card 4
Front
What does it mean if the net present value is negative?
Back
Card 5
Front
What does it mean if the net present value is positive?
Comments
No comments have yet been made