Present Value

Topics: Net present value, Internal rate of return, Cash flow Pages: 3 (880 words) Published: June 9, 2013
Ryan Nguyen
04/13/2013
Dr. Choi
Finance 3300

Exam 3 Short Essay.

Net Present value is the difference between an investment’s market value and its cost. For an example, you invest 100 dollars (Cost) into a lemonade stand but you receive 50 dollars (Market Value) of cash inflow. Another would be you buy a house for 50,000(Cost) But you sell it for 75,000(Market Value). Your net present value An Investment should be accepted if the net present value is positive and it should be rejected if the net present value is negative. Net present value uses the discounted cash flow of valuation, which is the process of valuing an investment by discounting future cash flows. Comparison to another rule, which is called the Internal rate of return, uses the discount rate that makes the NPV of an Investment zero. IRR finds the single rate that summaries the rate of return of a project. We only depend on cash flow of a particular investment not the rates offered elsewhere. For an example, you let your brother burrow 100 dollars but he pays you back 125 dollars. You would ask what is the return on this investment, which is 25% or 1.25 dollars back for every 1 dollar invested. This investment would be only valid if the required return is less than 25% because anything more would fall in negative value. The IRR Rule states an investment is only acceptable if the IRR exceeds the required return and if the required return is higher, it should be rejected. If your required rate of return is 10% but your actual IRR is 9& not exceed the required rate, you will lose money on the investment. NPV and IRR is but similar because it has to be greater than its capital. Where NPV = the difference of cost and market capital, cost should be less than market to exceed profit in similarity to required return should be less than internal rate of return. There is a scenario where they conflict which is in two mutually exclusive in which the two projects have different timing of...
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