Net present value rule


 

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Net present value rule

An investment is worth making if it has a positive NPV Projects with negative NPVs should be rejected.



Net present value rule

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Net present value

Net present value

A calculation which is based on the idea that £1 received in ten years' time is not worth as much as £1 received now because the £1 received now could be invested for those ten years and compound into a higher value.The NPV calculation establishes what the value of future earnings is in today's money. To do the calculation you apply a discount % rate to the future earnings. The further out the earnings are (in years) the more reduced their present value is.NPV is at the heart of securities analysis. Analysts use predictions of a company's future earnings and dividend payments, appropriately discounted back to current value, to establish a 'fundamental' value for the shares. If the current share price is below that value, then the shares are, on the face of it, attractive, If lower, they are 'overvalued'. In practice the analysis is more sophisticated, but it is based on the concept of NPV.


Proportional representation

Proportional representation

A method of stockholder voting that allows minority shareholders and groups of small shareholders to have a better chance of getting representation on a board of directors than under statutory voting.


Present Value Index (PVI)

Present Value Index (PVI)

The ratio of the NPV of a project to the initial outlay required for it. The index is an efficiency measure for investment decisions under capital rationing.


Present value of growth opportunities

Present value of growth opportunities

Net present value (NPV) of investments the firm is expected to make in the future.


Adjusted present value (APV)

Adjusted present value (APV)

The net present value analysis of an asset if financed solely by equity (present value of unlevered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leveraged buyout.


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