MGT 181 Lecture Notes - Lecture 4: Net Present Value, Decision Rule, Cash Flow

• School: UCSD
• Department: Rady School of Management
• Course: MGT 181
• Professor: L Jean Dunn

Document Summary

We need to ask ourselves the following questions when evaluating capital decision rules: Net present value is equal to the difference between the present value of a project"s expected cash flow and its cost: The first step is to estimate the expected future cash flows. The second step is to estimate the required return from projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment. If the net present value is positive, accept the project. A positive net present value means that the is expected to add value to the firm and will therefore increase the wealth of the owners. Since our goals is to increase owner wealth, net present value is a direct measure of how well this project will meet our goal. Payback: when evaluating a project the length of time it takes to get the initial cost back.