imported>Doug Williamson |
imported>Doug Williamson |
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| (NPV).
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| 1. | | 1. |
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| The total [[present value]] of all of the cash flows of a proposal - both positive and negative.
| | Any extended time period during which gross domestic product (GDP) decreases from one measurement period to the next. |
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| For example, the expected future cash inflows from an investment project LESS the initial capital investment outflow at Time 0.
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| <span style="color:#4B0082">'''Example'''</span>
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| A project requires an investment today of $100m, with $120m being receivable one year from now.
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| The cost of capital (r) is 10% per annum.
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| The NPV of the project is calculated as follows:
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| PV of Time 0 outflow $100m
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| = $(100m)
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| PV of Time 1 inflow $120m
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| = $120m x 1.1<sup>-1</sup>
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| = $109.09m
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| NPV = -$100m +$109.09m
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| = +$9.09m
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| 2. | | 2. |
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| In simple ''Net Present Value analysis'' the decision rule would be that:
| | A period of two successive quarters, or more, in which GDP decreases from the previous quarter. |
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| (1) All positive NPV opportunities should be accepted.
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| (2) All negative NPV opportunities should be rejected.
| | == See also == |
| | | * [[Deflation]] |
| | | * [[Depression]] |
| So the project in the example above would be accepted - on this basis - because its NPV is positive, namely +$9.09m.
| | * [[Double dip]] |
| | | * [[Great Depression]] |
| | | * [[Great Recession]] |
| However this assumes the unlimited availability of further capital with no increase in the cost of capital.
| | * [[Gross domestic product]] |
| | | * [[Inflation]] |
| A more refined decision rule is that:
| | * [[Reflation]] |
| | * [[Softness]] |
| | * [[Trumponomics]] |
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| (1) All negative NPV opportunities should still be rejected; while
| | [[Category:The_business_context]] |
| | | [[Category:Financial_products_and_markets]] |
| (2) All positive NPV opportunities remain eligible for further consideration (rather than automatically being accepted).
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| == See also ==
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| * [[Capital rationing]]
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| * [[CertFMM]]
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| * [[Discounted cash flow]]
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| * [[Economic value added]]
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| * [[Internal rate of return]]
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| * [[Investment appraisal]]
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| * [[Present value]]
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| * [[Residual theory]]
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| * [[Weighted average cost of capital]]
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