NET PRESENT VALUE TECHNIQUE

NET PRESENT VALUE TECHNIQUE

Formula:
CF1/(1+k)1  + CF2/(1+k)2...............CFn/(1+k)n - Initial Cost

CF1= Cash Inflow of 1st year
CF2= Cash inflow of 2nd year
.

k= Project Return

Decision Rule:
NPV>0         (+ve)         accept
NPV=0                          risky
NPV<0         (-ve)          Reject

According to this method those projects are accepted whose net present values are greater than zero (+ve) or equal to zero are accepted but risky and those projects whose net present value is less than zero (-ve) rejected.

It is a very good technique for selecting project

Example:
suppose

project          initial cost                                           years
                                                             1                      2                            3
A                  5000                             3000              2000                         0
B                  5000                              4500              400                           10,000
k=10%

after calculation
(NPV)A = (-)619          and   (NPV)B (+) 592

Project B is accepted.


FINANCIAL MANAGEMENT
DECISION AREA OF FINANCIAL MANAGEMENT
AGENCY PROBLEM
TYPES OF BUSINESS
FINANCIAL SYSTEM
FINANCIAL INTERMEDIARIES
TYPES OF FINANCIAL MARKETS
TIME VALUE OF MONEY
EXAMPLES AND FORMULA TIME VALUE OF MONEY
CASH FLOW,SUM,SERIES OF CASH, ANNUITY AND MIX STREAM
ANNUITY TYPES AND FORMULA
AMORTIZATION SCHEDULE OR TABLE WITH EXAMPLE
EFFECTIVE INTEREST RATE WITH EXAMPLE
VALUATION OF LONG TERM SECURITIES (BONDS)
TYPES OF BONDS
BONDS FORMULA,ZERO COUPON PERPETUAL
VALUATION OF LONG TERM SECURITIES (SHARE)
CASH AND MARKETABLE SECURITIES MANAGEMENT
MANAGING CASH INFLOW AND OUTFLOW
SECURITIES MANAGEMENT
SHORT TERM FINANCING
SPONTANEOUS LABILITIES
NEGOTIATED FINANCE
CAPITAL BUDGETING
CAPITAL BUDGETING TECHNIQUE
NET PRESENT VALUE TECHNIQUE
INTERNAL RATE OF RETURN TECHNIQUE
ACCOUNT RECEIVABLE MANAGEMENT
INVENTORY MANAGEMENT
FORCASTING

MBA NOTES FINANCIAL MANAGEMENT