Flashcards in Net Present Value & investment criteria Deck (10):

1

## What is the Net present value?

### the difference between an investment's market value and its cost

2

## What is Discounted Cash Flow Valuation?

### The process of valuing an investment by discounting its future cash flows

3

## What are the strengths of using the NPV?

###
it uses cash flows

uses all cash flows

discounts cash flows

*gives the value created for shareholder by a project*

4

## Payback is...? and when should you accept a project?

###
The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.

accept project with shortest payback

5

## What are the advantages and disadvantages of the payback period rule?

###
:) easy to understand

:) adjusts for uncertainty

:) biased towards liquidity

> ignores time value of money

> requires arbitrary cut-off point

> ignores cash flows beyond cut-off date

> biased against long-term projects such as R&D

6

## What is discounted payback?

### The length of time required for an investment' discounted cash flows to equal its initial cost

7

## What are the advantages and disadvantages of discounted payback?

###
:) INCLUDES time value of money

:) easy to understand

:) does not accept negative estimated NPV investments

:) biased towards liquidity

> may reject positive NPV investments

> requires an arbitrary cut-off point

> ignores cash flows beyond cut off date

>biased against long term projects

8

## what is AAR (average accounting return)?

### An investment's average net income divided by its average book value

9

## What is the Internal Rate of Return?

### The discount rate that makes the NPV of an investment zero.

10