Activity Overview
In this activity, students deal with cash flow and its present value, which is its worth in today's dollars. They will compare alternative investments by determining their Net Present Value and Internal Rate of Return. They will also determine, when called for, whether it is more profitable to lease or borrow money.
About the Lesson
Net Present Value
One method of comparing alternative investments is to compare their net present value (NPV). This method discounts cash flow to their present value, making possible a comparison of alternatives. The guidelines for the NPV Method are:
- In an accept-reject decision, if the NPV is positive, the investment should be made.
- In comparing mutually exclusive investment alternatives, determine which investment has the highest NPV and reject the others. If the highest NPV is positive, accept it. Be indifferent if the NPV is zero, and reject the investment if the NPV is negative.