Principles of Finance · free preview
Net Present Value
Net present value discounts all of a project's cash flows at the cost of capital and subtracts the initial cost, accepting positive values that create wealth and rejecting negative ones that destroy it, the value-correct standard of capital budgeting.
1. The NPV computation
The NPV computation
2. The discount rate's meaning
The discount rate's meaning
3. Advantages over payback and IRR
Advantages over payback and IRR
4. NPV in the firm
NPV in the firm
5. The NPV rule
A project's NPV, computed at the firm's cost of capital, is positive. What should the firm do?
6. Computing the NPV
A project costs 100,000 dollars and returns 45,000 at each year end for three years, with a 10 percent cost of capital. Approximately what is its NPV?
7. The rate's identity
What discount rate should a firm use in its NPV computations?
8. NPV versus payback
Which statement correctly compares NPV with the payback method?
9. The zero NPV case
What does an NPV of exactly zero signify?
10. Additivity's meaning
Why is NPV's additivity across projects a practical advantage?
11. The surplus over cost
NPV is the discounted value of inflows minus what single item? Answer with two words.
12. The acceptance threshold
Projects are accepted when NPV is greater than what number? Write the number.
13. The blended rate's name
What four-word term names the blended debt and equity rate used as the standard NPV discount rate? Answer in lowercase.
14. The value units
NPV expresses its verdict in dollars of value created, unlike payback's years. What two-word term names this value measure? Answer in lowercase.
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