1. Return on Investment – Net Present Value Method By R. S. Miolla

2. Agenda 1) What is return on investment (ROI)? 2) Time value of money concept. 3) Net Present Value Method.

3. 1) ROI or Capital Budgeting Answers: Is this a good financial investment? A long-term investment – Example: buying equipment, opening a plant Based on cash flows, not earnings – Statement of cash flows not the income statement

4. 2) Time Value of Money The idea that cash received today is worth more than cash in the future. An investment is made today- cash out. Return is earned in the future- cash in. Discount rate is a %. PV = FV/(1+i)^n PV = 100 (.826) = $82.60; n=2, i=10% Use an online financial calculator (Investopedia)

5. Investment Defined $10,000 cash outflow (investment) Cash inflows: » Investment AInvestment B Year 160002000 240002000 3 20002000 4 03000 5 04000

6. Net Present Value Method – Investment A The firm needs to pick a discount rate: 10% Year 16000 x.909 = 5454 Year 24000 x.826 = 4130 Year 32000 x.751 = 1502 Total NPV of inflows: 11086 NPV of the project: 11,086 – 10,000 = 1086

7. Net Present Value Method (NPV) – Investment B Year 12000 x.909 = 1818 22000 x.826 = 1652 32000 x.751 = 1502 43000 x.683 = 2049 54000 x.621 = 2484 NPV of inflows 9505 NPV of the project: 9,505 – 10,000 = (495)

8. Summary 1) Return on investment. 2) Time value of money concept. 3) Net Present Value Method.