MGCR 341 Lecture Notes - Lecture 3: Opportunity Cost, Cash Flow, Time Signature

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Npv rule: npv = pv (benefits) pv (costs) as long as npv > 0, decision increases the value of the firm and is a good decision regardless of your current cash needs/preferences. Npv profile : graphs project"s npv over a range of discount rates. 1 (1 + r)n ) thus take project with highest eaa should consider required life replacement cost (whether cost will change over time) Why does positive npv create value: provides higher return than that the market offers for investments of similar risk. Is npv rule too mechanical: difficulty is coming up with estimated fcf and discount rate in the first place. Where do positive npv projects come from? in competitive markets, firm can achieve npv > 0 only if firm has some advantage over competitors: project is a short-run deviation from equilibrium (eg. luck) Different resource requirements : if there"s fixed supply of resource, simply picking highest npv might not be best.

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