Podcast
Questions and Answers
What is the primary purpose of Net Present Value (NPV) analysis?
What is the primary purpose of Net Present Value (NPV) analysis?
What does a higher NPV indicate about a project?
What does a higher NPV indicate about a project?
What is the formula to calculate the annual discount factor?
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?
What is the ROI of an investment if you invested R100 last year and today your investment is worth R120?
Signup and view all the answers
What is the purpose of finding the internal rate of return (IRR) of a project?
What is the purpose of finding the internal rate of return (IRR) of a project?
Signup and view all the answers
What is the primary difference between NPV and ROI analysis?
What is the primary difference between NPV and ROI analysis?
Signup and view all the answers
Which of the following methods would you choose to rely on if different methods indicate that different projects should be selected?
Which of the following methods would you choose to rely on if different methods indicate that different projects should be selected?
Signup and view all the answers
What is the minimum acceptable rate of return for a project?
What is the minimum acceptable rate of return for a project?
Signup and view all the answers
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
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.
