# Measuring Investment Value: You Can Trust NPV - PowerPoint

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```					    Chapter 5 -- Measuring Investment
Value: You Can Trust NPV
 Goals   for this chapter:
able to calculate the NPV for projects with:
 Be
Year-end cash flows

Midyear cash flows

Mixed year-end and midyear cash flows

Understand the meaning of NPV
Understand management role in
conveying information to the market
NPV of Year End Cash Flows

 Calculatethe net present value of a project with year
end cash flows.
Problems 5-1 -- Even cash flows

Problems 5-4 -- Declining cash flows

Problems 5-5 -- Uneven cash flows

Problems 5-7 -- Overhaul cost and even cash flows

Problems 5-16 -- Growing cash flows

On all of these problems you can use the NPV
function to calculate the present value
Overview of the Calculation of NPV

 On   all NPV problems you must
 First   estimate and then calculate the cash flows for each year
   Remember inflows are positive and outflows are negative
 There     are three stages of a projects life
 The acquisition stage
 The operating stage

 The disposition stage

 Once  the cash flows for each period are estimated they need
to be discounted to present by multiplying by 1 / (1 + i )n
What Creates a Positive
Net Present Value?
 How  do the following interact to create a
positive net present value?
Market Imperfections

Strategy

Economic profit
Meaning of Net Present Value

 NPV   measures wealth created regardless of
whether or not the company includes debt in its
capital structure.
Tables 5-2 and 5-3

 NPV measures wealth created even in the
presence of income taxes.
Table 5-4

 The presence of risk changes a NPV to an
expected NPV with ranges
Management’s Role in Helping the
Market Assess the NPV of the Firm
 Management     must practice due diligence in
estimating the cash flows and NPVs and then
keep the shareholders informed so that the
market price will equal the intrinsic value over
time.
 If they do not, difficulties begin when investors
are not fully informed and the market price is
substantially different from the intrinsic value.

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