Net present value Flashcards
1
Q
When is money more valuable?
A
When received now rather than later
2
Q
How to calculate money’s present value?
A
Multiply future cash flows by discount factor.
3
Q
What does a positive net present value mean?
A
It means that the investment is profitable when considering time value of money.
4
Q
Benefits of net present value?
A
Net present value calculates the profitability of the investment
It considers the timing of cash flows
5
Q
Limitations of net present value
A
Harder to understand
Rate of interest may be incorrect
Cash flows may be inaccurate
6
Q
What do managers have to consider when making investment decisions?
A
Which has the shorter payback period? Which has the greater net present value What is the effect on profits What is the effect on cash flows How will this investment affect stakeholders
