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## Questions and Answers

What is the primary purpose of Net Present Value (NPV) analysis?

What does a higher NPV indicate about a project?

What is the formula to calculate the annual discount factor?

What is the ROI of an investment if you invested R100 last year and today your investment is worth R120?

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What is the purpose of finding the internal rate of return (IRR) of a project?

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What is the primary difference between NPV and ROI analysis?

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Which of the following methods would you choose to rely on if different methods indicate that different projects should be selected?

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What is the minimum acceptable rate of return for a project?

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## Study Notes

### Net Present Value Analysis

- Net Present Value (NPV) is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
- NPV means the return from a project exceeds the opportunity cost of capital — the return available by investing the capital elsewhere.

### Steps for Manually Calculating NPV

- Determine the estimated costs and benefits for the life of the project and the products it produces.
- Determine the discount rate, which is the rate used in discounting future cash flows.
- Calculate the net present value by subtracting the total discounted costs from the total discounted benefits.

### Return on Investment (ROI)

- ROI is the result of subtracting the project costs from the benefits and then dividing by the costs.
- ROI is always a percentage, and the higher the ROI, the better.
- Many organizations have a required rate of return for projects — the minimum acceptable rate of return on an investment.
- The internal rate of return (IRR) can be found by finding what discount rate results in an NPV of zero for the project.

### Payback Analysis

- Payback analysis is used to evaluate projects based on how long it takes to recover the initial investment.

### Weighted Scoring Models

- A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria.
- To create a weighted scoring model:
- Identify criteria important to the project selection process.
- Assign a weight to each criterion (so they add up to 100 percent).
- Assign numerical scores to each criterion for each project.
- Calculate the weighted scores by multiplying the weight for each criterion by its score and adding the resulting values.

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## Description

Learn about Net Present Value (NPV) analysis, a method to calculate the expected net monetary gain or loss from a project by discounting future cash inflows and outflows.