Net Present Value (NPV)

• What is MPV sometimes called?

  Net present value
• Why is it useful to use real numbers in explaining NPV?

  It provides clarity and continuity in examples
• How do you calculate NPV?

  Adjust expected returns for discount factors
• What does the time value of money (TVM) imply?

  A sum of money is worth more today
• Why do you need discount factors to calculate NPV?

  They adjust future cash flows to present value
• What does a positive NPV indicate about a project?

  It makes sense to proceed with the project
• What should you choose between two projects based on NPV?

  The project with the higher NPV
• What are the pros of net present value (NPV)?

  • Considers the time value of money
  • Indicates if a project should be accepted or rejected
• What are the disadvantages of net present value (NPV)?

  • Dependent on accurate forecasts
  • Future inflows are estimates
  • Interest rate changes affect discount factors
• How does the accuracy of forecasts affect NPV calculations?

  Inaccurate forecasts lead to incorrect NPVs
• What happens if the discount factor is wrong?

  Present values will also be incorrect