Ch 9: Net Present Value & Investment Basics

About This Chapter

This chapter will teach you how companies determine the value of various investment options. These lessons can help you improve your grades, study for exams, earn continuing education credit or simply learn about investment basics for the fun of it.

Net Present Value & Investment Basics - Chapter Summary

Explore several methods used to determine the potential profitability of any given venture. These simple and engaging lessons teach you the formula for calculating net present value as well as the differences between internal and modified rates of return and how to identify the types of cash flow needed during the capital budgeting process. After completing each lesson, take the accompanying self-assessment quiz to make sure you fully understand the basics of investment and net present value. Upon completion of the chapter, you should be able to:

  • Calculate net present value
  • Know the formula for payback analysis
  • Explain the discounted payback period
  • Assess the weaknesses of the average accounting return (AAR)
  • Compare the pros and cons of internal rate of return (IRR)
  • Define the modified rate of return (MIRR)
  • Outline the process of capital budgeting
  • Understand and calculate profitability index

8 Lessons in Chapter 9: Net Present Value & Investment Basics
Test your knowledge with a 30-question chapter practice test
How to Calculate Net Present Value: Definition, Formula & Analysis

1. How to Calculate Net Present Value: Definition, Formula & Analysis

The value of money changes over time. If you spoke to your parents or grandparents about what things cost when they were children, you will see a big difference. This concept is called net present value.

Payback Analysis: Formula & Example

2. Payback Analysis: Formula & Example

Payback analysis is an important financial decision-making tool. In this lesson, you'll learn what it is and how to apply the formula, and you'll see an example of payback analysis. You'll also have a chance to take a short quiz after the lesson.

Discounted Payback Period: Method & Example

3. Discounted Payback Period: Method & Example

In this lesson we will review how a business investor can use the discounted payback period to determine the break-even point for a particular investment while accounting for the time value of the money tied up in that business activity.

Average Accounting Return: Definition & Weaknesses

4. Average Accounting Return: Definition & Weaknesses

In this lesson we will review how the average accounting return can be used to evaluate business investment options and identify some of its weaknesses as an evaluation tool.

Internal Rate of Return: Advantages & Disadvantages

5. Internal Rate of Return: Advantages & Disadvantages

This lesson defines and explains the use of the internal rate of return. The lesson also explains the advantages and disadvantages of the internal rate of return.

Modified Rate of Return: Definition & Example

6. Modified Rate of Return: Definition & Example

In this lesson, we'll explain the three different approaches to the modified rate of return. In addition, we'll compare the modified rate of return to the internal rate of return.

Profitability Index Method: Definition & Calculations

7. Profitability Index Method: Definition & Calculations

Ever wish there was an easy way to quickly calculate if a business endeavor was worth your time and resources? The profitability index method gives you just such a way to quickly check the nature of a project.

Capital Budgeting: Definition & Process

8. Capital Budgeting: Definition & Process

From time to time, businesses must purchase large pieces of equipment to replace older equipment or expand product lines. In this lesson, you'll learn how businesses budget for these purchases.

Chapter Practice Exam
Test your knowledge of this chapter with a 30 question practice chapter exam.
Not Taken
Practice Final Exam
Test your knowledge of the entire course with a 50 question practice final exam.
Not Taken

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