Accept projects if NPV > 0 Reject projects if NPV < 0
Net Present value can simply be understood as follows Present Value PV = $100 bank gives me 10% interest on 1 year in FD so i defined r = 0.1 I have the choice to either keep / use that money and have no opportunity to grow it, or i can grow it by investing in FD, in which case my $100 is locked in and unusable in case i decide to invest it FV after 1 year is $110 $FV = PV*(1+r)^t$
so we define NPV as $NPV = - PV + FV(1+r)^t$
Separation Theorem
We can seperate
- when to consume
- what projects to choose