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=NPV($B$3,B7:B16)+B6

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