31.2: Net Present Value and Internal Rate of Return

Question 1

What is NPV?

Answer 1

The present value of an investment’s cash inflows (benefits) minus the present value of its cash outflows (costs).

Question 2

Formula for NPV in terms of a conventional cash flow?

Answer 2

NPV = Σ t=1 * CFt / (1+r)^t - Outlay

Question 3

Formula for NPV in terms of a non-conventional cash flow?

Answer 3

NPV = Σ t=0 * CFt / (1+r)^t

Question 4

What is important to remember when calculating NPV?

Answer 4

The first cash flow is set at t=1 by default.

Question 5

What is the internal rate of return (IRR)?

Answer 5

The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).

Question 6

What is the internal rate of return (IRR) formula?

Answer 6

Σ t=1 * CFt / (1+IRR)^t = Outlay

Question 7

What is the Hurdle rate?

Answer 7

The rate of return that a project’s IRR must exceed for the project to be accepted by the company.