1. Return on Investment – Net Present ValueMethod By R. S. Miolla

2. Agenda • 1) What is return on investment (ROI)? • 2) Time value of money concept. • 3) Net Present Value Method.

3. 1) ROI or Capital Budgeting • Answers: Is this a good financial investment? • A long-term investment • Example: buying equipment, opening a plant • Based on cash flows, not earnings • Statement of cash flows not the income statement

4. 2) Time Value of Money • The idea that cash received today is worth more than cash in the future. • An investment is made today- cash out. • Return is earned in the future- cash in. • Discount rate is a %. • PV = FV/(1+i)^n • PV = 100 (.826) = $82.60; n=2, i=10% • Use an online financial calculator (Investopedia)

5. Investment Defined • $10,000 cash outflow (investment) • Cash inflows: • Investment A Investment B • Year 1 6000 2000 • 2 4000 2000 • 3 2000 2000 • 4 0 3000 • 5 0 4000

6. Net Present Value Method – Investment A • The firm needs to pick a discount rate: 10% • Year 1 6000 x .909 = 5454 • Year 2 4000 x .826 = 4130 • Year 3 2000 x .751 = 1502 • Total NPV of inflows: 11086 • NPV of the project: 11,086 – 10,000 = 1086

7. Net Present Value Method (NPV) – Investment B • Year 1 2000 x .909 = 1818 • 2 2000 x .826 = 1652 • 3 2000 x .751 = 1502 • 4 3000 x .683 = 2049 • 5 4000 x .621 = 2484 • NPV of inflows 9505 • NPV of the project: 9,505 – 10,000 = (495)

8. Summary • 1) Return on investment. • 2) Time value of money concept. • 3) Net Present Value Method.