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Chapter 26: Q22RQ (page 1464)

What is net present value?

Short Answer

Expert verified

The term net present value (NPV) shows the current total present value of the future cash flow. If the NPV of an investment is positive, then the investment will attractive.

Step by step solution

01

Importance

Present value is crucial. It enables investors to determine whether the cost of an investment is reasonable is reasonable or not.

02

Calculation of NPV

NPV can be calculated by subtracting the sum of discounted cash flows from the initial investment. The discounted cash flows are evaluated using the discounting factor and applied to the present value.

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Most popular questions from this chapter

What is the payback method of analyzing capital investments?

List some common cash inflows from capital investments.

Lockwood Company is considering a capital investment in machinery:

Initial investment $ 600,000

Residual value 50,000

Expected annual net cash inflows 100,000

Expected useful life 8 years

Required rate of return 12%

8. Calculate the payback.

9. Calculate the ARR. Round the percentage to two decimal places.

10. Based on your answers to the above questions, should Lockwood invest in the machinery?

Why are net present value and internal rate of return considered discounted cash flow methods?

Describe the capital budgeting process.
See all solutions

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