Cf

NPV of Project = !-- Initial Investment

CFt = Cash flow in period t r = Discount rate N = Life of the project Thus, the net present value of a project with the cash flows depicted in Figure 5.3 and a discount rate of 12% can be written as:

Net Present Value (NPV): The net present value of a project is the sum of the present values of the expected cash flows on the project, net of the initial investment.

Once the net present value is computed, the decision rule is extremely simple since the hurdle rate is already factored in the present value.

Decision Rule for NPV for Independent Projects If the NPV > 0 -> Accept the project

Note that a net present value that is greater than zero implies that the project makes a return greater than the hurdle rate. The following examples illustrate the two approaches. §2»

^ This spreadsheet allows you to estimate the NPV from cash flows to the firm on a project

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