CHEN 4501W Lecture Notes - Lecture 7: Net Present Value, Cash Flow, Fixed Capital
20 Sep 2015
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3:35 pm: why is npv superior to other, simpler forms of profitability estimation such as payback period. Each c term is discounted to account for time value of money. Since npv puts one-time demand and recurring costs on an equal footing, it can be broadly applied to almost any decision involving finances. For example, npv concepts are useful for decisions on process maintenance, modification, etc. Pump a lasts 3 years and costs y dollars. Pump b lasts 2 years and costs x dollars (x = (2/3)y) In 6 year period, need 2 a pumps and 3 b pumps. In 6 year period, need 2 a pumps and 3 b pumps buy both b and a this year r=0. 15. One will use a higher value of the discount rate, r, for projects that are higher in risk: must npv always be greater than 0 to accept a project. 0 means break even at whatever r value you choose.
