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The formula for NPV can be written as:
How much value is created from undertaking an investment?
The first step is to estimate the expected future cash flows.
The second step is to estimate the required return for projects of this risk level.
The third step is so find the present value of the cash flows and subtract the initial investment.
NPV=total PV of future CF??s + Initial investment
Estimating NPV
1 estimate future cash flows. How much and when.
2 estimate discount rate
3 estimate initial costs
If the NPV is positive, accept the project
A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners...
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