In short
Net present value is the present value of a project's future cash flows, discounted at the required rate of return, minus the initial investment. A project with a positive net present value adds value.
Key takeaways
- The internal rate of return is the discount rate at which net present value is zero.
- Net present value assumes cash flows are reinvested at the discount rate.
- Depreciation matters only through its effect on tax cash flows.
Example
An investment of $100,000 returning $40,000 a year for 3 years at 10%: present value $99,474, so the net present value is −$526 and the project is rejected.
Where it's tested
BAR: Financial Forecasting, Budgeting & Valuation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A product sells for $80 with variable costs of $50 per unit. Fixed costs are $360,000. How many units must be sold to earn a target operating profit of $90,000?