ITPEC FE Morning April 2019 Question 79
ITPEC FE Morning April 2019 — Question 79 of 80
Net Present Value (NPV) — investment evaluation by summing discounted future cashflows
NPV is the method that makes decisions based on the sum of future cashflows discounted by a discount rate. It calculates how much all expected future earnings are worth today.
Formula concept: NPV = Σ (Cash Flow_t / (1 + r)^t) − Initial Investment
- •If NPV > 0 → project is profitable
- •If NPV < 0 → project loses money
Correct answer: b) Net Present Value Method (NPV)
Why not others:
- a) IRR (Internal Rate of Return) — finds the discount rate that makes NPV equal to zero; it does not sum discounted cashflows itself
- c) PBP (PayBack Period) — measures how long it takes to recover the initial investment; basic version ignores discounting entirely
- d) ROI (Return on Investment) — calculates profit as a percentage of investment cost; no discounting involved
Key rule: "Sum of future cashflows discounted by a rate" = NPV by definition.
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