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Financial Statements by Thomas Ittelson

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Chapter 21. Net Present Value (NPV)

We’re going to invest cash now with high hopes of a large future return. But will the anticipated payback be enough to cover our initial investment given the project’s high risk? Further, would any of our alternative projects provide us with a better financial return? Answering these questions is the essence of capital budgeting, and net present value (NPV) analysis provides “gold standard” answers.

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The NPV of a proposed project is the value of future cash benefits minus costs, all restated in terms of today’s money. In NPV analysis, relevant cash inflows and outflows are discounted to compute the present value ...

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