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All 11 Flashcards — Net present value — NPV (HL only)
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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
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Full study notes for Net present value — NPV (HL only)
Topic 3.8 hub
Investment appraisal
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