Practice Flashcards
Flip to reveal answersWhat is NPV?
Track your progress — Sign up free to save your progress and get smart review reminders based on spaced repetition.
All 11 Flashcards — Net present value (HL only)
Sign up free to track progress and get spaced-repetition review schedules.
Question
What is NPV?
Answer
Net Present Value — the present value of all future cash flows minus the initial cost. Accounts for time value of money.
💡 Hint
Present value of future CFs - cost
Question
NPV = sum of discounted CFs minus ___. Positive = ___
Answer
Initial investment; accept.
💡 Hint
Investment; accept
Question
Two advantages of NPV over payback?
Answer
Considers time value of money; uses ALL cash flows (not just until payback point).
💡 Hint
Time value + all cash flows
Question
NPV calculation steps?
Answer
Multiply each year's net cash flow by its discount factor, then sum all results minus initial investment.
💡 Hint
CF × DF for each year, then sum
Question
Compare NPV with ___ and ___ in evaluation questions
Answer
Payback period and ARR — each has different strengths.
💡 Hint
Payback + ARR
Question
Time value of money means ___
Answer
Money today is worth more than the same amount in the future — because you could invest it now.
💡 Hint
Today > future
Question
Investment $100k. Y1=$40k(×0.909), Y2=$50k(×0.826), Y3=$40k(×0.751). NPV?
Answer
$36,360 + $41,300 + $30,040 - $100,000 = +$7,700. Positive → accept!
💡 Hint
+$7,700
Question
Two disadvantages of NPV?
Answer
Complex; relies on estimated cash flows; discount rate is subjective; hard to explain to non-financial managers.
💡 Hint
Complex + estimates + subjective rate
Question
The discount rate choice significantly affects ___
Answer
The NPV result — a higher rate reduces present values, potentially turning positive NPV negative.
💡 Hint
The result
Question
Discount factors will be ___ in the exam
Answer
Given — you don't calculate them. Just multiply each year's cash flow by the given factor.
💡 Hint
Given
Question
Positive NPV → ___. Negative NPV → ___. Zero NPV → ___
Answer
Accept (earns more than required return). Reject. Breakeven (earns exactly the required return).
💡 Hint
Accept, reject, breakeven
Read the notes
Full study notes for Net present value (HL only)
Topic 3.8 hub
Investment appraisal
More from Topic 3.8
All flashcards in this topic
BM exam skills
Paper structures & tips
Track your progress with spaced repetition
Sign up free — Aimnova tells you exactly which cards to review and when, so you remember everything before your IB exam.
Start Free