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NPV: capital budgeting and the NPV decision rule

Define the Net present Value(NPV) method in capital budgeting and state the NPV decision rule. In economic terms, what does the NPV amount represent?

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Net present value is the difference between the investment cost and the present value of the future cash flows (net of tax) expected from the investment using a discount rate appropriate given the minimum required rate of return.

The NPV decision rule: If the NPV is positive (more than zero), the project throws off a greater return than required and ...

Solution Summary

Your response is 190 words and explains the answer to each of the three questions and then gives two scenarios to show you how NPV works and how to interpret the amount when the NPV is above and below zero. Response is in everyday language suitable for novices.