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Figure 12-2: An initial investment returns positive future cash flows.
The NPV is negative, so this analysis indicates that buying the snowplow is not a good investment. Several
factors that influence the result:
• First, a “good investment” is defined in the formula as one that returns 10%. If you can settle for a lesser re-
turn, lower the discount rate.
• The future cash flows are generally (but not always) estimates. In this case, the potential plow owner as-
sumes increasing revenue over the ten-year life of the equipment. Unless he has a ten-year contract to plow
snow that sets forth the exact amounts to be received, the future cash flows are educated guesses at how
much money he can make.
• Finally, the initial investment plays a significant role in the calculation. If you can get the snowplow dealer
to lower his price, the ten-year investment may prove worthwhile.
No initial investment