# Npv and Cash Flow

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Learning Team Reflection
The net present value (NPV) is the total present value of a time series of cash flows. NPV is used to determine what an investment is worth (present value of all cash flows) and how much it costs.
The NPV of an investment is found when cash flows are discounted at the projects required return rate, otherwise known as a discount rate (Emery, Finnerty & Stowe, 2007). Discount rates reflect the riskiness of the expected future cash flows of a project. However, NPV should be calculated using a project specific discount rate due to the wide range of non-diversifiable risks specific to each project.
If a firm uses a single discount rate to compute NPV of a portfolio of projects, it will assume more risk over time. This is because different projects may actually have lower risks or diversifiable risks (that can be eliminated through diversification) or higher risks. In that case, using one discount rate will apply higher risk to otherwise lower risk projects or lower risk to high risk projects masking the actual riskiness of the project. Any decisions made purely using NPV as the criteria may end up being incorrect or inaccurate, which will add more risk to a firm over time. Net present value is the total present value of a time series of cash flows. The net present value (NPV) method discounts all cash flows at the projects require return (Emery, Finnerty & Stowe, 2007). If a company uses this method it is because the projects are independent of each other. The downside to this is that using a single discount rate may show incorrect assumptions based on their

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