Present Value and NET Present Value

Question 1

How do you convert FUTURE VALUE into PRESENT VALUE

Answer 1

So to convert a future value to a present value, you divide the future value by an interest multiple.

Question 2

What is NET PRESENT VALUE

Answer 2

Net present value is the sum of all discounted future CF minus any initial investment

Question 3

Decision Rule- when capital is not limited (refer to the NPV value)

Answer 3

If capital is not limited, accept all projects where NPV ≥ 0

Question 4

Decision rule- when capital is rationed (refer to npv value)

Answer 4

If capital is ‘rationed’, then rank projects by NPV.