NET PRESENT VALUE

1. Pros & Cons

1.1. Advantages

1.1.1. Time Value of Money

1.1.2. Decision-making

1.2. Drawbacks

1.2.1. Hidden Cost

1.2.2. Hard to Determine the Required Rate of Return

1.2.3. Cannot compare projects with different life spans

2. NPV Decision Rules

2.1. Independent: accepted if NPV >0

2.2. Mutually Exclusive: accepted if NPV is the highest positive one; meanwhile, reject all if there is no positive NPV project.

3. EXAMPLES

3.1. Based on independent projects, choose both Project S & L

3.2. Based on mutually exclusive projects, choose Project L

4. Definition

4.1. present value of the project's FCF discounted at the cost of capital

4.2. how much a project contributes to shareholders’ wealth

4.2.1. larger NPV, more value adds and higher stock price

5. Formula

5.1. Calculation

5.2. Explanation

5.2.1. Positive NPV = the project should be approved

5.2.2. Zero NPV = the project may or may not be passed

5.2.3. Negative NPV = the project is rejected