25.5.B. Discounted Cash Flow (DCF) Techniques

Try these first

1. 1.

   Define Net Present Value (NPV).

   Hint

   Think about how future cash flows are valued against initial investments.

2. 2.

   What does a positive NPV indicate?

   Hint

   Remember the acceptance rule based on cash flow values.

3. 3.

   What does a net present value greater than zero signify?

   • Reject the project
   • Accept the project
   • Break even

   Hint

   Remember the basic acceptance rule for investments based on cash flows.

4. 4.

   True or False: The Profitability Index can be used to prioritize projects when funds are limited.

   • True
   • False

   Hint

   Think about how you evaluate which projects to invest in first.

5. 5.

   An investment project requires an initial outlay of $250,000 and expects to generate cash inflows of$80,000 at the end of each year for 4 years. Calculate the NPV using a discount rate of 12%. Thrive and discuss if the investment is beneficial.

   Hint

   Break it down year by year to simplify.

6. 6.

   If a project has an unconventional cash flow pattern—say, it generates $50,000 in the first year, loses$20,000 in the second, and earns $60,000 in the third. Discuss how you would determine the IRR and the challenges faced.

   Hint

   Focus on the pattern and implications on calculation methodologies.