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 Students learn how to use NPV and related formulas.

# Using NPV to make Investment Decisions

Objectives

• Understand how to decide which items to include in the cash flow analysis after tax corporate cash flow
• Understand how to choose among alternate projects
• Understand how to utilize limited capital, management time, and other scarce resources
• Understand and define opportunity cost

USING NPV LESSON PLAN

Teaching Materials

• Lesson - Using NPV to make Investment Decisions (see below for printable lesson)

• Many pre-calculated interest examples

Lesson Activity

1. Two applications for NPV
• cash flow analysis
• investment decisions
• discuss the subjectivity
2. Discuss difference between cash flow and accounting earnings
• ask class how they would determine the costs of an investment
• discuss the 4 items (purchases, additional expense, revenue from sale of existing, and taxes)
• go through examples
3. Introduce concept of incremental cash flow
• Discuss the impact of net earnings and tax benefit
• Look at formula and work through example
4. Introduce concept of equivalent annual cost
• Why is this used?
• Look at formula and work through example
5. Discuss miscellaneous factors that affect investment decisions
6. Introduce opportunity cost
• Ask class for definition and examples
• Look at real life situation and factors for calculating opportunity cost
Assessment/Evaluation

Have students complete worksheet. A passing grade is 70% or greater.

Print out the teaching lesson pages and exercise worksheets for use with this lesson:

 NPV INVESTMENT LESSON Lesson and worksheet. Back to more Basic Finance and Economics Lessons, Lesson Plans, and Worksheets           For teaching and learning general money skills, personal finance, and money management, please go to the Money Instructor home page.

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