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The Net Present Value (NPV) Rule

The Net Present Value (NPV) Rule

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The Net Present Value (NPV) Rule

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  1. The Net Present Value (NPV) Rule Accept investment projects that have positive NPV > 0

  2. What is the Net Present Value (NPV)?

  3. Today’s money “grows” in value over time. (Imagine depositing the money in a bank, earning interest, over a long period of time.) Conversely, future money “shrinks” in value when brought backwards in time to the present. Why?

  4. As notation, replace CF0 with PV0, or simply “PV” and you have the present value formula! This bracketed term is known as a discount factor, which can be found on a discount factor table (see Appendix F in the text)

  5. Present Value (PV) and Net Present Value (NPV) The present value (PV) of a single future cash flow, or a stream of future cash flows, is just the discounted value of the cash flow(s): The net present value (NPV) of an investment (today) equals the present value of the future cash flows of the investment, less today’s investment cost (Inv0)

  6. The NPV Rule for Investment Decision-Making

  7. Billingsgate Battery Example (cont.)

  8. Billingsgate Battery Example (solution)

  9. Why is the NPV Rule Better?

  10. Remaining Questions