1- The difference between a project’s value and its cost is the Net present value .

2- PV is the sum of the discounted cash flows .

3- Invest in project x if npv > 0 greater than zero .
4- NPV 3 RULES = 1- a dollar today is worth more than a dollar tomorrow , 2- npv depends on the
forecasted cash flows and the opportunity cost of capital . 3- pv aare all ,easured in today s
dollar so yo can add them all up .
5- The operating expenses are deducted from each years income. , the capital expenditures are put
on the firms balance sheet and then depreciated .
6- Book rate of return = book income / book assets .
7- Pay back = is found by counting the years it takes before the cumulative cash flow equals the
initial investment. The payback rule : the project should be accepted if the payback period is less
than some specified cutoff period .
8- The drawbacks of payback period are : 1- it ignores all cash flows after the cutoff date. 2- it gives
equal weight to all cash flows before the cutoff date.
9- The discounted cash flow will never accept a project with a negative npv , and it still ignore the
cash flow after the cut off date .
10- IRR = the discount rate that makes the npv = 0 .
11- Not to be confused between IRR and the cost of capital , the IRR is a profitability measure that
depends on the amount and timing of the project cash flows. The opportunity cost of capital is a
standard of profitability that we use to calculate how much the project is worth.
12- IRR rule is to accept the project if the opportunity cost of capital is less than the IRR , then the
npv is positive . If cost of capital is equal to IRR then the npv is 0 . And if its greater then the npv
is negative .
13- When we lend money we want a high rate of return , when we borrow money we want a low
rate of return .

Ex1 : a discounted cashflow will not accept a negative npv project but will turn down some
positive npv .
If a firm uses single cut off period they will accept too many short lived projects.
EX4 : if iam borrowing money to finance a project that will raise me cash in the future I want
rate of return that is low ( irr should be less than the opportunity cost of capital ) .
Ex6 : the incremental cash flow is the difference between the 2 cash flows of the projects ( even
cf 0 ( the higher – lower ) even the irr of the two !
$1000 $1000 $1000 $1000
Ex8 : calculate npv = NPVC   $3000      $39.47
(1.10) (1.10) 2 (1.10) 4 (1.10) 5