Finance

The difference between an investment's market value and its cost

The process of valuing an investment by discounting its future cash flows.

An investment should be accepted if the NPV is positive and rejected if it is negative.

The amount of time required for an investment to generate cash flows to recover its inital cost.

the length of time required for an investments discounted cash flows to equal its initial cost.

an investment is acceptable if its calculated payback is less than some prespecified number of years.

The discount rate that makes the NPV of an investment zero.

An investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.

A graphical representation of the relationship between an investments NPV and various discount rates.

one potential problem in using the IRR method if more than one discount rate makes the NPV of an investment zero.

one potential problem in using the IRR method is the acceptance of one project excludes that of another.

1) The first cash flow(s) is/are negative and all the rest are positive.

2) The decision to accept/reject the project does not affect the decision to accept/reject any other.

• the present value of an investment's future cash flows divided by its initial cost.
• (Also the benefit/cost ratio)