FINS1613 Lecture Notes - Lecture 4: Cash Flow, Net Present Value
Ivestet Decisio Rules
Characteristics of Projects
• Profits and Costs – Expected Cash flow
Valuing a project must account for
• Time value of money
• Uncertainty and Risk
DECISION RULE
• Make a consistent decision whether to accept or reject projects
(a discount rate which is determined by the company)
NPV – Net Present Value
• Determines the present value of all the cash flows in the project.
Essentially the net increase or decrease in firm wealth.
• Accept project if NPV is positive, reject if it is negative.
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Document Summary
Characteristics of projects: profits and costs expected cash flow. Valuing a project must account for: time value of money, uncertainty and risk. Decision rule: make a consistent decision whether to accept or reject projects (a discount rate which is determined by the company) Npv net present value: determines the present value of all the cash flows in the project. Essentially the net increase or decrease in firm wealth: accept project if npv is positive, reject if it is negative. For conventional cash flows: usually the higher the better (not always) as this means that a higher discount is required for the project to not be worth it, accept projects whose irr > required rate of return. Note: financing decisions where there is positive flow followed by negative flow irr < If conventional, you can use it for accepting or rejecting individual projects (irr > required rate. ) You still need npv when comparing different projects.
