D076 Unit 6 EXAMS ALREADY VERIFIED

Net Present Value (NPV) - the sum (or net) of the present values of all of the project's expected cash inflows and outflows. Advantages of NPV - Considers time value of money Calculates value added to the firm Considers risk and required return Disadvantages of NPV - Requires calculation of appropriate cost of capital Is not useful to compare projects of varying sizes Internal Rate of Return (IRR) - The rate of return that a firm earns on its capital projects. Hurdle Rate - The required rate of return that a company expects to earn in order to consider a project. Advantages of IRR - is easy to interpret, considers time value of money, and does not require use of required rate of return. Disadvantages of IRR - is not a good indicator of the amount of value created, ignores mutually exclusive projects, assumes reinvestment at the IRR rate, cannot be used to compare projects with different durations, and requires conventional cash flows.