Chapter 2: Valuation of Cash Flows and Fixed Income Securities: An Abridged Analysis

In order to judge profitability of an investment, say, a firm's investment in a project, it becomes necessary to compare present values of cash inflows (benefits) and outflows (costs). The net present value (NPV) criterion that looks at the difference between present values of benefits and costs is a standard tool for this type of analysis. Alternatives to this are benefit–cost ratio and internal rate of return (IRR), a discount rate that makes NPV equal to zero. In this chapter, we present a brief discussion on these criteria. A brief discussion on bond as a particular type of constant earning security is also presented.