Chapter 7. Evaluating investments by using net present value criteria

Questions answered in this chapter:

  • What is net present value (NPV)?

  • How can I use the Excel NPV function?

  • How can I compute NPV when cash flows are received at the beginning of a year or in the middle of a year?

  • How can I compute NPV when cash flows are received at irregular intervals?

Consider the following two investments, whose cash flows are listed in the NPV.xlsx file and shown in Figure 7-1:

  • Investment 1 requires a cash outflow of $10,000 today and $14,000 two years from now. One year from now, this investment will yield $24,000.

  • Investment 2 requires a cash outflow of $6,000 today and $1,000 two years from now. One year from now, this investment will yield $8,000.

Which is the ...

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