25.5.B.1. Net Present Value (NPV)

Try these first

1. 1.

   What does NPV stand for?

   Hint

   Think about how investments are evaluated over time.

2. 2.

   Is a positive NPV good or bad?

   Hint

   Remember, it means you're expected to make more than you spend.

3. 3.

   What does a positive NPV indicate about a project?

   • The project is not profitable.
   • The project is profitable.
   • Insufficient data.

   Hint

   Remember the acceptance criteria for NPV.

4. 4.

   True or False: NPV accounts for the time value of money.

   • True
   • False

   Hint

   Think about how money's value changes over time.

5. 5.

   A company is considering two different projects. Project A has cash inflows of $150,000 for 5 years and requires an initial investment of$400,000. Project B generates cash inflows of $250,000 for 3 years with the same initial investment. If the discount rate is 10%, calculate the NPV for both projects to determine which one the company should accept.

   Hint

   Carefully break down the cash flows year by year.

6. 6.

   Assume you estimate future cash flows of $500,000,$600,000, and $700,000 over the next three years for a new project with an initial investment of$1,500,000 and a discount rate of 5%. Calculate the NPV and suggest whether to proceed with this project.

   Hint

   Calculate each cash inflow's present value to arrive at the total NPV.