ACTSC231 Lecture Notes - Lecture 10: Net Present Value, Cash Flow, Decision Rule

• School: University of Waterloo
• Department: Actuarial Science
• Course: ACTSC231
• Professor: Keith Freeland

Document Summary

Example: the pv of due in 2n years plus the. Pv of due in 4n years is . 68. If i 12 9. 6% find n. i . 096. 12 0. 008 eff. rate of int. per month. 61997 1. 008 24n ln. 61997 24nln1. 008 n ln. 61997. The npv is the pv of the net cash flow for an investment project. Often there is an initial cost to start a new project (building costs, new machine costs etc. ). The decision rule is that firms should under take investment projects with a positive npv. The rate of interest used is called the cost of capital and is not clearly defined. Let ct the cash flow at time t 0,1,2, , n. Npv i c0 c1v c2v2 cnvn, where v 1. If npv i 0, then accept the project. Example: an investment of ,000 produces the following year-end net cash flows: