Essay About Net Present Value And Time Zero Cash Flows

Capital Budgeting – the process of choosing the bests investment projects.
Because they are rarely used in practice and inefficient techniques, we will not cover Payback, Discounted Payback and Accounting Rate of Return.
NPV – Net Present Value – Present value of a projects cash flows
Opportunity Cost of Capital – The appropriate discount rate
The rate of return given up by investing in a project
The risk-adjusted rate of return
The rate of return investors could earn on an investment of equal risk
How to Make a Capital Budgeting Decision
1. Forecast the projects cash flows
2. Determine the opportunity cost of capital
3. Discount all cash flows to time zero at the opportunity cost of capital
4. Net out all the time zero cash flows – thats your NPV
5. If NPV > 0, accept the project
If NPV < 0, reject the project Rule of Thumb: Accept all positive NPV projects Example: Cost: $100,000