Question

As written, the Net Present Value formula does what:

		discounts all previous cash flows by a discount rate, i.
		discounts all future cash flows by a discount rate, i.
		compounds all future cash flows by a compound rate, i.
		solves the world's problems
		compounds all past cash flows by a compound rate, i.

Answer 1

The Answer is “ Discounts all future cash flows by a discount rate, i.”

- The Net Present Value [NPV] of an investment proposal is determined by subtracting the Present Value of outflows from the Total present value of future annual cash flows

- Net Present Value [NPV] = Present Value of Annual future cash inflows – Present Value of outflows

- The Present Value of total annual cash inflows is calculated by discounting the future cash flows at the discount rate, “i”

- The Main objective of a capital budgeting decision technique is to make a decision with respect to a whether to buy an assets or to make a repair to old assets or the junk assets.

- The most commonly used capital budgeting technique is the Net Present Value [NPV] method. In this NPV method, the investment proposal shall be acceptable if the Net Present Value is positive, or else it rejected.