ACCT-311 Lecture Notes - Lecture 4: Net Present Value, Cash Flow, Investment
25 Mar 2016
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A smaller project frees up funds at t = 0 for investment. The higher the opportunity cost, the more valuable these funds, so high r favours small projects. The project with faster payback provides more cf in early years for reinvestment. If r is high, early cf is especially good, Npv assumes reinvesing at r (opportunity cost of capital, wacc). Reinvesing at opportunity cost, r, is more realisic, so npv method is best. Npv should be used to choose between mutually exclusive projects if a conlict exists. Cost (negaive cf) followed by a series of posiive cash inlows. Most common: cost (negaive cf), then string of posiive cfs, then cost to close project. For example, nuclear power plant or strip mine. Cash flow paterns in yearsinlow (+) or ouflow (-) With two irrs, npv is negaive between 0 and the irst irr but posiive between the two irrs and negaive again beyond the second irr.
