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The​ decision model that computes the difference between the present value of the​ investment's net cash​ inflows, using a desired rate of​ return, and the cost of the initial​ investment is best described by which of the following​ terms?

Anonymous

The “decision model that computes the difference between the present value of the investment’s net cash inflows, using a desired rate of return, and the cost of the initial investment” is best described by which of the following terms?




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    2 Answers

    1. Quizzma Team

      Net Present Value

    3. Anonymous

      The decision model you are describing is the Net Present Value (NPV) model.
      Net Present Value (NPV) is a method used to evaluate the profitability of an investment or project. It calculates the difference between the present value of the expected future cash inflows and the initial investment cost.
      The key components of the NPV calculation are:

      1. Present Value of Net Cash Inflows: The future cash inflows generated by the investment are discounted back to their present values using a specified discount rate, which typically represents the desired rate of return or the opportunity cost of capital.
      2. Initial Investment Cost: The amount of money required to make the initial investment or acquire the asset.

      The formula for NPV is:
      NPV = Present Value of Future Cash Inflows – Initial Investment Cost
      If the NPV is positive, it means the investment is expected to generate a return that exceeds the desired rate of return, making it a potentially profitable investment. If the NPV is negative, it suggests that the investment may not generate enough returns to justify the initial cost.
      The NPV model is widely used in capital budgeting and investment decisions because it accounts for the time value of money and provides a comprehensive evaluation of the investment’s potential profitability.

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