ACC 220 Lecture Notes - Lecture 12: Net Present Value, Payback Period, Discount Window
Document Summary
Factors of production: land, labor, and capital. Distinguished by incorporation of time value of money. Assume cash flows are even throughout the year. Substitute average cash flow if cash flows are variable. Quick, inaccurate, misleading in high inflation environments. Shortest payback period is best and lowest risk. Useful for measuring compliance with debt covenants. Net income is high risk number on financial statements. Accounting rate of return = verage income. Financial metric most likely to be manipulated by managers. Future money is less valuable (risk, inflation, etc) Algebraic relationship between present and future values. [ ( + r n ] r. [ ( + r (n 1) ] r. Summation of present value of all of a project"s cashflow (positive and negative) Positive npv return over the discount rate. Zero npv return exactly at the discount rate. Negative npv return below the discount rate. Projects can be ranked amongst themselves by the size of their relative npvs.
