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  • In Other Words, NPV Is The Additional Value Created in The Investment, So para Di Ka Lugi, NPV Should Always Be Positive

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    The document discusses key financial concepts used to evaluate investments including the weighted average cost of capital (WACC), minimum attractive rate of return (MARR), present value, net present value (NPV), internal rate of return (IRR), and payback period. Specifically, it notes that the NPV should be greater than 0 for an investment to not result in a loss, and that the IRR should not be solely used to evaluate projects as only the NPV reliably determines if a project should be accepted or rejected.

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    Some notes on engineering economy

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    Engineering Economy

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    The document discusses key financial concepts used to evaluate investments including the weighted average cost of capital (WACC), minimum attractive rate of return (MARR), present value, net present value (NPV), internal rate of return (IRR), and payback period. Specifically, it notes that the NPV should be greater than 0 for an investment to not result in a loss, and that the IRR should not be solely used to evaluate projects as only the NPV reliably determines if a project should be accepted or rejected.

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    6 views1 page

    In Other Words, NPV Is The Additional Value Created in The Investment, So para Di Ka Lugi, NPV Should Always Be Positive

    Uploaded by

    Steven
    The document discusses key financial concepts used to evaluate investments including the weighted average cost of capital (WACC), minimum attractive rate of return (MARR), present value, net present value (NPV), internal rate of return (IRR), and payback period. Specifically, it notes that the NPV should be greater than 0 for an investment to not result in a loss, and that the IRR should not be solely used to evaluate projects as only the NPV reliably determines if a project should be accepted or rejected.

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    of 1

    Rate of return = risk-free rate + percent return

    WACC – weighted average cost of capital

    MARR – minimum attractive rate of return. MARR > WACC for investors to get attracted

    Present Value – maximum price at which an investor is willing to pay to be able to acquire a claim in
    future cash flow

    Net Present Value – extra return aside from the risk free rate of return. NPV should always be greater
    than 0.

    In other words, NPV is the additional value created in the investment, so para di ka lugi, NPV should
    always be positive.

    Longer time of investments means higher risk premium (or the rate of return inexchange of the risk that
    is being taken by investing)

    Internal rate of return – equates PV of investment cost to PV of future cash flows. This equation makes
    the NPV = 0. – intuitively appealing to most people but shouldnt be a made a guide when making
    business decisions. Only NPV

    - Also not reliable when ranking projects


    - Modified IRR, found using terminal value of the cashflow as the reference

    Payback period method – calculated the number of years needed for the inflows to equal to cashflows

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