What is NPV? :
What is NPV? NPV of the financial decision is the difference between the present value of inflows & the present value of outflows.
NPV is an indicator of how much value an investment or project adds to the firm.
Used for capital budgeting, and it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.
What NPV means? :
What NPV means?
How to calculate NPV? :
How to calculate NPV? FORMULA: Ct=cash inflow in the period t
C0=cash outflow of today
K=required rate of return
T=time period
Example: :
Example: This project will have an immediate cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1–6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 1–6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%.
Slide 7:
The decision should be: Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project.
Any questions??? :
Any questions???