Net present value
In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading. Formula

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms, ,
where
t - the time of the cash flow
i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) Rt - the net cash flow (the amount of cash, inflow minus outflow) at time t (for educational purposes, R0 is commonly placed to the left of the sum to emphasize its role as (minus the) investment. The result of this formula if multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay will be the present value but in case where the cash flows are not equal in amount then the previous formula will be used to determine the present value of each cash flow separately. Any cash...

...situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal.
a. 0 Moral hazard
b. 0 Zero-sum game
c. 0 Adverse selection
d. 0 The behavioral principle
Objective: Discuss 12 principles of foundational corporate finance.
3. Which of the following correctly completes the next sentence? The value of any asset is the presentvalue of all future
a. 0 profits it is expected to provide
b. 0 revenue it is expected to provide
c. 0 net working capital it is expected to provide
d. 0 cash flows it is expected to provide
Objective: Compare and contrast the market value of an asset or liability from the book value.
4. Original maturity refers to
a. 0 a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time
b. 0 the price for which something could be bought or sold in a reasonable length of time, where reasonable length of time is defined in terms of an item’s liquidity
c. 0 the length of an asset’s life when it is issued
d. 0 the net amount, or net book value, for something shown in quarterly accounting statements
Week Two: Business Valuation
Objective: Apply the capital-asset pricing model to calculate a business’s required return.
5. The principle of __________...

...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue - Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate - Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)-t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...

...investment but low rate investment such as T-bills or bonds.
E) Which of the following is true about the NPV and IRR techniques?
1) The NPV and IRR techniques always provide the same ranking of different investment projects.
2) The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.
3) All projects can have only one value for NPV and one value for IRR.
4) The NPV technique cannot provide information on how acquiring the project will contribute to shareholders’ wealth.
Explanation: NPV calculates presentvalue of investment and opportunity cost of capital and IRR takes time value of money and cost of capital into consideration as well.
F) Which of the following is false?
1) The profitability index method explicitly considers the time value of money and the firm’s cost of capital.
2) The payback period is preferred by managers since it is simple, easy to calculate, and estimates how quickly the project cash flows will return the investment in the project.
3) The disadvantages of the payback period method are that it ignores project cash flows which occur after the payback period as well as the time value of money.
4) The profitability index method always ranks all projects in the same way that the IRR method does.
Explanation: In IRR method projects are accepted if the IRR is greater then...

...cash flows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive netpresentvalue? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire life. b The annual net cash flow of the investment. c The cost of the investment. d The expected life of the investment. Use the following data for questions 4 and 5. Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straight-line depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy. 4 Refer to the above data. The payback period for this investment is: a 8 years. b 4 years. c Over 13 years. d 2.5 years. 5 Refer to the above data. Return on average investment for this investment is: a 25%. b 20%. c 12 1/2%. d 15%.
CHAPTER 26 10-MINUTE QUIZ B
NAME SECTION
#
Physician’s Pharmacy is considering the purchase of a copying machine which it will make available to customers at a per-copy charge. The copying machine has an initial cost of $7,500, an estimated useful life of five years, and an estimated salvage value of $500. The estimated annual...

...(Worth 1 points)
Which of the following NOT correct?
Independent or non-mutually exclusive alternatives can be accepted at the same time.
The modified internal rate of return assumes that inflow are reinvested at 80 percent of the internal rate of return
This is a correct answer
It is the difference in the reinvestment assumptions that can be significant in determining when to use the presentvalue or internal rate of return methods.
Under the netpresentvalue method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital
Points earned on this question: 1
Question 2 (Worth 1 points)
A project has initial costs of $3,000 and subsequent cash inflows in years 1 – 4 of $1350, 275, 875, and 1525. The company's cost of capital is 10%. Calculate IRR for this project.
10.00%
11.75%
12.25%
This is a correct answer
13.15%
Points earned on this question: 0
Question 3 (Worth 1 points)
The Internal Rate of Return of a capital investment…
Changes when the cost of capital changes
Is equal to the annual net cash flows divided by one half of the project’s cost when the cash flows are an annuity
Must exceed the cost of capital in order for the firm to accept the investment
This is a correct answer
None of the above options are correct
Points earned on this question: 0
Question 4 (Worth 1 points)...

...bond offers a 4% coupon rate, paid semiannually. The market price of the bond is $1,000, equal to its par value.
a. What is the payback period for this bond?
b. With such a long payback period, is the bond a bad investment?
c. What is the discounted payback period for the bond assuming its 4% coupon rate is the required return? What general principle does this example illustrate regarding a project’s life, its discounted payback period, and its NPV?
A8-1. a. Payback on this bond is 25 years. You pay $1,000. You receive $40 a year for 25 years, a total of $1,000.
b The bond is not necessarily a bad investment. Payback does not take time value of money into account, nor does it account for cash flows received after the payback period. It is more appropriate to calculate the NPV of an investment. Given the risk level of the bond, is 4% a fair return? If the answer is yes, then the bond may be a good investment.
c The discounted payback, using a 4% discount rate, is 30 years. This shows that unless the acceptable payback period is decreased when discounted payback is used, vs. regular payback, then projects which return money late in the life of the investment are even more disadvantaged under discounted payback than under regular payback. NPV is a more appropriate method to use to determine the value of an investment project.
P8-4. Calculate the netpresentvalue (NPV) for the...

...Finance for managers
Chapter 7— NetPresentValue and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are
1) Netpresentvalue: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost.
NPV = Presentvalue of cash inflow- Presentvalue of cash outflow
The investment should be accepted if the netpresentvalue is positive and rejected if it is negative.
2) Profitability index: PI is a discounted cash flow technique in which presentvalue of an investment’s future cash inflows divided by its initial cash outflow. It is also called benefit/cost ratio.
PI = PV of cash inflows / PV of cash outflows
If PI is positive, it will be accepted otherwise reject.
3) Internal rate of return: IRR is the discount rate that equates the presentvalues of cash inflows with the initial investment associated with the project thereby causing NPV = 0
If IRR ≥ required rate of return the project is accepted. If IRR < required rate of return the project is rejected....

...of finance believe that if the market value of the firm’s equity is maximized; the goal of the financial management is attained. There are two versions of the goals of the financial Management: Profit Maximization and Wealth maximization.
Profit maximization: This is a goal wherein, the returns are maximized with the best output and price levels. A firm’s performance is evaluated in terms of profitability. The target of maximization of profit is very traditional and narrow approach. Allocation of resources and investor’s perception of the firm’s performance can be traced to the goal of profit maximization. Some criticism of the profit maximization goal is as stated below:
O The concept lacks clarity. Basic question is – What does profit mean? After tax or before tax profit? Whether it is operating profit or it is the net profit?
O With such un-clarity, Profit is neither defined precisely or correctly. Such differences in the interpretation of the profit concept thus expose the weakness of profit maximization.
O It doesn’t consider the time value of money or NPV of cash inflow.
O It fails to consider the fluctuation of profit.
O Despite this lacuna, Profit does matter for any kind of business. Ensuring continual profit ensures maximization of the shareholder’s wealth.
Wealth Maximization: It is also known as value maximization or NPV maximization. This is possible only when, the firm pursues policies which...