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Financial statements
provide you with a way to assess your company's current financial
situation. But what about future projects? When you are considering
taking on a new project, or starting a new business, you need to
look at:
- The risk
involved
- The cost
of taking on the project
- How profitable
you think it will be
Net Present
Value (NPV) analysis is a tool for evaluating these factors,
so that you can make a better decision on whether or not a project/venture
is worthwhile. In this course we will not go into detail on NPV
analysis, but we will provide you with the basic formula and how
to use it, so that you can begin to incorporate it into your company's
decision-making process.
NPV Analysis
takes the projected (estimated) cash flows that will be generated
from the venture/project, and "discounts" them, translating their
future value into the value today. The cost of the project is subtracted
from these discounted cash flows (DCF's) to give the total
value of the project.
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