FIN 300 Lecture Notes - Lecture 10: Net Present Value, Decision Rule, Cash Flow

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We need to ask ourselves the following questions when evaluating decisions. The difference between the market value of a project and its cost. The first step is to estimate the expected future cash flows. The second step is to estimate the required return for projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment. If the npv(net present value) is positive, accept the project. A positive npv means that the project is expected to add value to the firm and will therefore increase the wealth of owners. Since our goal is to increase owner wealth npv is a direct measure of how well this project will meet our goal. Formula : cf1/(1+r)+ cf2/(1+r)^2+ cf3/(1+r)^3+ cf4/(1+r)^4+ , npv= 63120/(1. 12)+ 70800/(1. 12)^2+ 91080/(1. 12)3 165000=12627. 42, accept the project because its positive.

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