Q22RQ - Horngren'S Financial And Managerial Accounting

Question

What is net present value?

Step-by-Step Solution

Answer

The term net present value (NPV) shows the current total present value of the future cash flow. If the NPV of an investment is positive, then the investment will attractive.

Step 1: Importance

Present value is crucial. It enables investors to determine whether the cost of an investment is reasonable is reasonable or not.

Step 2: Calculation of NPV

NPV can be calculated by subtracting the sum of discounted cash flows from the initial investment. The discounted cash flows are evaluated using the discounting factor and applied to the present value.