Introduction to Finance

Net present value (NPV) Correct Answers The difference between an investment's market value and its cost Discounted cash flow (DCF) Correct Answers The process of valuing an investment by discounting back its future cash flows Net present value rule Correct Answers An investment should be accepted if the net present value is positive and rejected if it is negative Payback period Correct Answers The amount of time required for an investment to generate cash flows sufficient to recover its initial cost Payback period rule Correct Answers An investment is acceptable if its calculated payback period is less than some pre-specified number of years Average accounting return Correct Answers An investments average net income divided by its average book value Average net income / average book value Internal rate of return (IRR) Correct Answers The discount rate that makes the NPV of an investment zero Average accounting return rule Correct Answers A project is acceptable if its average accounting return exceeds a target average accounting return IRR rule Correct Answers An investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise. Net present value profile Correct Answers A graphical representation of the relationship between an investment's NPV and various discount rates