About This Chapter
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
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.
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.
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.
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.
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.
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.
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.
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.
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Other chapters within the Finance 101: Principles of Finance course
- Introduction to Corporate Finance
- Financial Statements, Taxes & Cash Flow
- Financial Statement Basics
- Long-Term Financial Planning & Growth
- Introduction to Valuation Methods
- Discounted Cash Flow Valuation
- Interest Rates & Bond Valuation
- Stock Valuation
- Capital Investment Decisions
- Accounting Risk & Return
- Return, Risk, & the Security Market Line
- Options & Corporate Finance
- Cost of Capital
- Financial Leverage & Capital Structure
- Dividends & Dividend Policy
- Short-Term Financing & Planning
- Cash & Liquidity Management
- Credit & Inventory Management
- International Corporate Finance
- Studying for Finance 101