ECON 2560 Chapter Notes - Chapter 8: Net Present Value, Discounted Cash Flow, Payback Period

• School: University of Guelph
• Department: Economics
• Course: ECON 2560
• Professor: Tahsin Mehdi

Document Summary

Opportunity cost of capital: expected rate of return given up by investing in a project (also known as discount rate) Net present value (npv): present value of cash flows minus initial investment. You can guess/predict/forecast the value of future investments but will never be certain. Most investors avoid risk when they can do so without sacrificing return. Npv rule works for projects of any length (1 + r) (1+r)2 (1+r)3. If multiple years it can be smarter to recognize the cash flows are level and you can use the annuity formula to calculate present value. Pv = cash flow x annuity factor x [(1/ discount rate) (1/ discount rate (1 + discount rate) ^ years)] Npv calculations are only as good as the underlying cash-flow forecast. Pentagon law of large projects says that anything big takes longer & costs more than you were originally led to believe. Using the npv rule to choose among projects.