imported>Doug Williamson |
imported>Doug Williamson |
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| (NPV).
| | ''Banking''. |
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| 1.
| | The time period for which a bank would be able to use its liquidity buffer to survive a liquidity stress, while taking other measures to ensure its longer-term survival. |
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| The total present value of all of the cash flows of a proposal - both positive and negative - netting off negative present values against positive ones.
| | For example, the period in the Liquidity Coverage Ratio is 30 days. |
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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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| | == See also == |
| | * [[Buffer]] |
| | * [[Cash flow insolvent]] |
| | * [[HQLA]] |
| | * [[LAB]] |
| | * [[Liquidity]] |
| | * [[Liquidity buffer]] |
| | * [[Liquidity Coverage Ratio]] |
| | * [[Stress]] |
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| <span style="color:#4B0082">'''Example'''</span>
| | [[Category:Accounting,_tax_and_regulation]] |
| | | [[Category:The_business_context]] |
| A project requires an investment today of $100m, with $120m being receivable one year from now.
| | [[Category:Identify_and_assess_risks]] |
| | | [[Category:Manage_risks]] |
| The cost of capital (r) is 10% per annum.
| | [[Category:Risk_frameworks]] |
| | | [[Category:Risk_reporting]] |
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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.
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| In very simple ''Net Present Value analysis'' the decision rule would be that:
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| (1) All positive NPV opportunities should be accepted.
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| (2) All negative NPV opportunities should be rejected.
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| So the project in the example above would be accepted (on the basis of this simple form of the NPV decision rule) because its NPV is positive, namely +$9.09m.
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| However this assumes the unlimited availability of further capital with no increase in the cost of capital.
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| A more refined decision rule is that:
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| #All negative NPV opportunities should still be rejected; while
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| #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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| * [[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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