lesson 6 net present value of money

net present value (NPV)

Present value of cash flows minus initial investment.

opportunity cost

Benefit or cash flow forgone as a result of an action

Internal Rate of Return (IRR)

The discount rate at which a project NPV = 0.

drawbacks of irr

1. Assumes reinvestment at the

IRR rate

2. Favors early cash flow

3. Does not acknowledge size

4. May have more than one

answer since quadratic equation

Payback

calculates how long it takes to get the money invested back. lets you take a decision of wether the project is good or not

Discounted Payback period

is the time period it takes for the discounted cash flows generated by the project to cover the initial investment in the project

Profitability Index (PI

 is the ratio of PV of the cash flows divided by the initial investment.