Question

The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, a positive cash flow in 2 years, and a positive cash flow in 3 years is:_________

Answer 1

The formula for finding the net present value is -C0 + [C1 / (1 + r)] + [C1 / (1 + r)²] + [C1 / (1 + r)³].

What is the net present value?

The net present value is a capital budgeting method. Net present value is the present value of after-tax cash flows from an investment less the amount invested.

Only projects with a positive net present value should be accepted. A project with a negative net present value should not be chosen because it isn't profitable. When choosing between positive  net present value projects, choose the project with the highest  net present value first because it is the most profitable.

An advantage of the net present value method of capital budgeting is that it considers the times value of money. A disadvantage of net present value is that it is difficult to estimate the accurate discount rate.

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