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Incorporation of risk into PV and NPV

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How can risk be incorporated into PVs and NPVs?

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Solution Summary

The answer contains the detailed explantion regarding incorporation of risk into Present Value and Net present value

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Net Present value is the difference between the present value of cash inflows and the present value of the cash outflows.

Present value of the cash outflow is the amount of money spent now on a purchase of machine or starting of the project. Then the cash outflow expected from the use of the machine or the execution of the project will be found out. Since the present value of dollar one at present is more than the value of the dollar in future. Therefore, the cash inflows to be accrued will be discounted at the ...

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