Investment Decision Rules - The NPV Decision Rule
3 important questions on Investment Decision Rules - The NPV Decision Rule
How goes the NPV decision rule?
When choosing between different investment options, go with the highest NPV
To what cashflow is accepting a project with NPV=x equivalent?
The cashflow of x today.
How is paying €1500 one year from now instead of today equivalent to a cash inflow of €71,43 today under a 5% interest rate?
Because when payed today it costs €1500. But when payed one year from now, one can store €1500/1.05 = €1428.57 in the bank and use that to pay the €1500 one year from now. The profit is pocketing the €1500-€1428.57 = €71.43 today
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