# Npv - Sensible Discussion

Submitted By wongsungyuen
Words 3175
Pages 13
Net present value
In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.
In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, above the cost of funds.
NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) — is called the yield and is more widely used in bond trading.
Contents
[hide] * 1 Formula * 2 The discount rate * 3 Use in decision making * 4 Interpretation as integral transform * 5 Example * 6 Common pitfalls * 7 History * 8 Alternative capital budgeting methods * 9 See also * 10 References
Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then...

### Similar Documents

#### Corporate Finance

...MSc Corporate Finance Dr. Kirak Kim Before we start Main branches of finance Corporate Finance How do we value projects and (optimally) finance them? Asset Pricing How do we price securities more precisely? What’s the difference? Is it a Corporate Finance question or an Asset Pricing question? □ You are the manager of Intel Corp. You are reviewing the proposal for the new plant to be built in China. The new plant requires a large onetime investment but will provide significant capacity addition as well as cost savings over the next 10 years. Should you approve the proposal for the new plant? □ “HSBC FTSE 100” is a index fund that replicates FTSE 100 index. The fund offers investors a convenient diversification at a low price. Would you be interested in investing in the fund (or somewhere else)? » What if it was TESCO that was considering HSBC FTSE 100 as an investment vehicle?  □ In 2004, Sergey Brin and Larry Page, the founders of Google Inc., were talking to investment bankers from Morgan Stanley. They hope to finance a number of potential opportunities through IPO (initial public offering). One of the most important concerns is of course what the offering price should be. Part 1 Project Valuation Dr. Kirak Kim MSc Corporate Finance EFiMM0017 Project Valuation  Investment decision  Revisit: Valuing unlevered cash flows  Revisit: Uncertainty and the notion of risk  Weighted average cost of capital  Adjusted present value Two......

Words: 8376 - Pages: 34

#### P4: Difference Between Financial and Advanced Financial Management

...Paper P4 is the advanced financial MANAGEMENT paper at the Professional level. It follows on from Paper F9 at the Fundamentals level. As throughout the ACCA syllabus, the Fundamentals paper covers the main technical areas that all accountants are required to master, whereas the Professional paper builds on that knowledge and explores advanced skills and techniques. In particular Paper P4 expects candidates to have more depth of knowledge, better analytical skills, and to be able to exercise greater professional judgement than at Paper F9. Hence, instead of being asked to value a bond, a potential Paper F9 question, candidates will need to be able to recognise the need to calculate a bond value given the scenario. For instance candidates may be required to evaluate the potential gain to the shareholders of a target company, of various offers from a predator company. If one of these offers includes bonds then the value of the bonds will need to be calculated, unless of course it is given in the question. Another key distinction between Paper F9 and Paper P4 is that in general the scenarios that candidates will be faced with will refer to larger, more complex and more international organisations. A calculative example of this is the need to be able to appraise projects carried out overseas whereas a discursive example is the need to be able to discuss the role of key international organisations such as the International Monetary......

Words: 3127 - Pages: 13

#### Yield Curve Estimation

Words: 2657 - Pages: 11

#### Financial Management Theory Write Up

...M&M Proposition 1 The Modigliani-Miller theorem forms the basis of modern thinking on capital structure. The theorem states that under a certain market price process, in the absence of taxes, bankruptcy cists, agency costs and asymmetric information, an in an efficient market, the value of a firm is unaffected by how the firm is financed. Whether the firm’s capital is raised by issuing stock or selling debt does not affect the value of the firm. This theory is also referred to as the capital structure irrelevance principle, which we have already looked at in previous seminar discussions. There are two propositions which were discussed by Modigliani and Miller. The first proposition states that the value if a firm does not depend on its capital structure. An example would be if two firms with the same business operations and similar kind of assets, where to be assessed after using either stocks or debt to finance the firm of s. On the left side their balance sheets, these firms will look the same, only difference being the right side, i.e. the liabilities and how they finance business activities. M&M proposition 1 therefore says that how the debt and equity is structured in a corporation is irrelevant as the value of the firm is determined by real assets and not its capital structure. Implications of this proposition firstly revolve around the issue of changing capital structure. Assuming that the three conditions identified by M&M apply and considering a......

Words: 2369 - Pages: 10

#### We Are Big Inc

...INFS7570 GREEN COMPUTING RESEARCH PROJECT BRYAN O’HERLIHY SPRING 2014 TABLE OF CONTENTS (ix) Table of Contents (x) Executive Summary I. Project Integration………………………………………………………………… 6 II. Project Scope…………………………………………………………………….. 14 III. Project Time Management……………………………………………………….. 21 IV. Project Cost Management………………………………………………………... 24 V. Project Quality Management…………………………………………………….. 29 VI. Project Human Resource Management…………………………………………...34 VII. Project Communications Management…………………………………………...39 VIII. Project Risk Management………………………………………………………...45 IX. Project Procurement Management………………………………………………..50 References & Bibliography…………………………………………….................55 EXECUTIVE SUMMARY The Green Computing Research Project is an initiative commissioned by We Are Big, Inc., to research green technologies, with a long-term objective of helping to improve the environment through technology, while increasing revenues and decreasing costs. A main purpose of the project is to research possible applications of green computing including: ● Data center and overall efficiency; ● Disposal of electronic waste and recycling; ● Telecommuting; ● Virtualization of server resources; ● Thin client solutions; ● Use of open source software; ● Development of new software to address green computing for internal use and potential sale to other organizations The overall allocated budget for the Green......

Words: 5265 - Pages: 22

#### Principles of Corporate Finance

...Ch. 14. An overview of Corporate Finance. 14.1 Cash for investments is generated mostly (USA: 80%) internally as depreciation and retained earnings. Still, companies have a gap between cash they need and cash they generate internally. This gap is financial deficit. So companies have to either sell new equity or borrow.This causes two different kinds of problems: 1) The plow back ratio? => Dividend policy 2) The proportions of debt and issue of equity? => Debt policy. • Net stock issue is negative = Company repurchases more stocks than issues them. Reasons for internally generated funds: a) avoid cost of issuing securities b) investors don’t get the message from lower future profits and higher risk. Recent years firms have issued more debt than equity. Still, there are many ways to calculate the Debt ratio of company: 1) Debt / total assets = ( Short + long term debt ) / Total assets, or 2) Proportion of debt in long term financing) = Long term liabilities Long term liabilities + stockholders’ equity The Debt Ratios has risen since 1950 because of the book value of the corporate assets falls as behind the actual value of those assets. This is caused the inflation. And the new tools for risk management......

Words: 17960 - Pages: 72

#### Finance

...Finance Course: Corporate Finance MBA−10 California College for Health Sciences MBA Program McGraw-Hill/Irwin abc McGraw−Hill Primis ISBN: 0−390−55204−6 Text: Harvard Business School Entrepreneurship Cases Corporate Finance, Seventh Edition Ross−Westerfield−Jaffe Harvard Business School Finance Cases This book was printed on recycled paper. Finance http://www.mhhe.com/primis/online/ Copyright ©2005 by The McGraw−Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher. This McGraw−Hill Primis text may include materials submitted to McGraw−Hill for publication by the instructor of this course. The instructor is solely responsible for the editorial content of such materials. 111 FINAGEN ISBN: 0−390−55204−6 Finance Contents Ross−Westerfield−Jaffe • Corporate Finance, Seventh Edition I. Overview 1 1 20 34 34 35 70 98 130 152 152 193 219 219 241 241 275 1. Introduction to Corporate Finance 2. Accounting Statements and Cash Flow II. Value and Capital Budgeting Introduction 4. Net Present Value 5. How to Value Bonds and Stocks 7. Net Present Value and Capital Budgeting 8. Risk Analysis, Real Options, and Capital Budgeting III: Risk 10. Return and Risk: The......

Words: 179333 - Pages: 718

#### Modeling

...EXCEL MODELING AND ESTIMATION IN CORPORATE FINANCE Third Edition CRAIG W. HOLDEN Max Barney Faculty Fellow and Associate Professor Kelley School of Business Indiana University Copyright © 2008 by Prentice Hall, Inc., Upper Saddle River, New Jersey 07458 To Kathryn, Diana, and Jimmy. Contents iii CONTENTS   Preface ..................................................................................... vii  Third Edition Changes .................................................................................... vii  What Is Unique About This Book ..................................................................... x  Conventions Used In This Book .......................................................................xi  Craig’s Challenge ........................................................................................... xiii  The Excel Modeling and Estimation Series .................................................. xiii  Suggestions for Faculty Members ..................................................................xiv  Acknowledgements ........................................................................................... xv  About The Author ................................................................. xvi  PART 1 TIME VALUE OF MONEY ..... 1  Chapter 1 Single Cash Flow ....................................................1  1.1 Present Value .......................................................................................

Words: 33587 - Pages: 135

#### Financial Study on Service Appartment

...Capital Investment Analysis [FIDELITY SERVICE APARTMENT] Course name: Financial Management Dr. Jahangir Alam Professor IBA, University of Dhaka Group 13 IBA, BBA 20th, Section A Date of submission: 23rd June 2013, Sunday 1 Capital Investment Analysis [FIDELITY SERVICE APARTMENT] NAMES ID NUMBER Munkasir Masud Muhammad Saiyedul Muttaqin Bijoya Chakraborty Kashfia Tabassum Ahmed Imtiaz Farhan Bin Habib ZR-06 ZR-11 RH-22 RH-42 ZR-61 2 Capital Investment Analysis [FIDELITY SERVICE APARTMENT] 23rd June 2013 Dr. Jahangir Alam Professor Institute of Business Administration University of Dhaka Subject: Letter of Transmittal Sir We are pleased to submit the Capital investment analysis on Fidelity service apartment’s ltd. We have completed the report through putting the theories and techniques learnt throughout the Financial Management course. This report contains analysis of the current market situation as well as possible the evaluation of the feasibility of the project. We have recommended some marketing and financial scopes which might prove imperative. We have tried our very best to tailor the report according to your guidelines. Therefore, we request you to accept our report. We believe that you will find it in order. We are eagerly expecting your feedback on the overall report. Thank you. Yours respectfully Group 13 IBA, BBA 20th, Section- A __________________________ Munkasir Masud, ZR- 06 __________________________ Bijoya......

Words: 15083 - Pages: 61

#### Financial Management

...FINANCIAL MANAGEMENT- 12MBA25 FINANCIAL MANAGEMENT 12MBA25 VTU SECOND SEMESTER FINANCIAL MANAGEMENT- 12MBA25 MODULE -1 FINANCIAL MANAGEMENT Financial management is an academic discipline which is concerned with decision-making. This decision is concerned with the size and composition of assets and the level and structure of financing. In order to make right decision, it is necessary to have a clear understanding of the objectives. Such an objective provides a framework for right kind of financial decision making. The objectives are concerned with designing a method of operating the Internal Investment and financing of a firm. There are two widely applied approaches, viz. (a) profit maximization and (b) wealth maximization. The term 'objective' is used in the sense of an object, a goal or decision criterion. The three decisions - Investment decision, financing decision and dividend policy decision are guided by the objective. Therefore, what is relevant - is not the overall objective but an operationally useful criterion: It should also be noted that the term objective provides a normative framework. Therefore, a firm should try to achieve and on policies which should be followed so that certain goals are to be achieved. It should be noted that the firms do not necessarily follow them. Profit Maximization as a Decision Criterion Profit maximization is considered as the goal of financial management. In this approach, actions that Increase profits should be undertaken......

Words: 21079 - Pages: 85

#### Solution Manual of Principles of Corporate Finance

...security earns 5%, then in one year we will receive \$1,050. Thus: NPV = C0 + [C1/(1 + r)] = −\$1000 + (\$1050/1.05) = 0 This is not a surprising result because 5 percent is the opportunity cost of capital, i.e., 5 percent is the return available in the capital market. If any investment earns a rate of return equal to the opportunity cost of capital, the NPV of that investment is zero. NPV = −\$1,300,000 + (\$1,500,000/1.10) = +\$63,636 Since the NPV is positive, you would construct the motel. Alternatively, we can compute r as follows: r = (\$1,500,000/\$1,300,000) – 1 = 0.1539 = 15.39% Since the rate of return is greater than the cost of capital, you would construct the motel. 3. Investment (1) NPV Return 2. − 10,000 + 18,000 = \$5,000 1.20 18,000 − 10,000 = 0.80 = 80.0% 10,000 9,000 − 5,000 = 0.80 = 80.0% 5,000 5,700 − 5,000 = 0.14 = 14.0% 5,000 4,000 − 2,000 = 1.00 = 100.0% 2,000 (2) − 5,000 + 9,000 = \$2,500 1.20 5,700 = −\$250 1.20 4,000 = \$1,333.33 1.20 (3) − 5,000 + (4) − 2,000 + a. b. Investment 1, because it has the highest NPV. Investment 1, because it maximizes shareholders’ wealth. 1 4. a. b. NPV = (−\$50,000 + \$20,000) + (\$38,000/1.05) = \$6,190.48 NPV = (−\$50,000 + \$20,000) + (\$38,000/1.10) = \$4,545.45 In Part (a), the NPV is higher than the NPV of the office building (\$5,000); therefore, we should accept E. Coli’s offer. In Part (b), the NPV is less than the NPV of the office building, so we should not accept the......

Words: 74775 - Pages: 300

#### Nism Project Finance

...Project Finance Module NATIONAL STOCK EXCHANGE OF INDIA LIMITED Dtp-Sys-9\D:\F\2012\F-902-12-Project_Finance/F-902-12-Project_Finance.indd Test Details: Sr. No. Name of Module Fees (Rs.) Test Duration (in minutes) No. of Questions Maximum Marks Pass Marks (%) Certificate Validity 1 Financial Markets: A Beginners’ Module * 1686 120 60 100 50 5 2 Mutual Funds : A Beginners' Module 1686 120 60 100 50 5 3 Currency Derivatives: A Beginner’s Module 1686 120 60 100 50 5 4 Equity Derivatives: A Beginner’s Module 1686 120 60 100 50 5 5 1686 120 60 100 50 5 1686 120 60 100 50 5 7 Interest Rate Derivatives: A Beginner’s Module Commercial Banking in India: A Beginner’s Module Securities Market (Basic) Module 1686 120 60 100 60 5 8 Capital Market (Dealers) Module * 1686 105 60 100 50 5 9 Derivatives Market (Dealers) Module * 1686 120 60 100 60 3 1686 120 60 100 60 5 1686 120 60 100 60 5 12 FIMMDA-NSE Debt Market (Basic) Module Investment Analysis and Portfolio Management Module Fundamental Analysis Module 1686 120 60 100 60 5 13 Financial Markets (Advanced) Module 1686 120 60 100 60 5 14 Securities Markets (Advanced)......

Words: 33608 - Pages: 135

#### Health Care Finance

Words: 226746 - Pages: 907

#### Solution to Corporate Finance

...Contents Part A Concept Questions ................................................................................................. A-1 Part B Chapter 2: Chapter 3: Chapter 4: Appendix 4A: Chapter 5: Appendix 5A: Chapter 6: Chapter 7: Chapter 8: Chapter 9: Chapter 10: Chapter 11: Chapter 12: Chapter 13: Chapter 14: Chapter 15: Chapter 16: Appendix 16B: Chapter 17: Chapter 18: Chapter 19: Chapter 20: Chapter 21: Chapter 22: Chapter 23: Chapter 24: Chapter 25: Chapter 26: Chapter 27: Chapter 28: Chapter 29: Chapter 30: Chapter 31: Answers to End-of-Chapter Problems Accounting Statements and Cash Flow ................................................................... Financial Planning and Growth ............................................................................... Net Present Value .................................................................................................... Net Present Value: First Principles of Finance ........................................................ How to Value Bonds and Stocks ............................................................................. The Term Structure of Interest Rates, Spot Rates, and Yields to Maturity ............. Some Alternative Investment Rules......................................................................... Net Present Value and Capital Budgeting ............................................................... Risk Analysis, Real Options, and......

Words: 154415 - Pages: 618