Payback and net present value (discounted cash flow) of a capital project: terminology including payback period, net present value, discount factor, cost of capital
Capital investment appraisal uses specific terms to judge whether a large purchase is worthwhile. These four terms — payback period, net present value, discount factor, and cost of capital — form the essential vocabulary for the whole topic.
Formula
NPV = Σ (Net Cash Flow × Discount Factor) − Initial Investment
Real World
When HS2 Ltd appraised the high-speed rail project, it used a government-set cost of capital (discount rate) to convert decades of future passenger revenue into today's values, producing a net present value that helped justify the £56 billion spending decision.
Exam Focus
Define each term precisely — examiners expect you to distinguish discount factor (the multiplier) from cost of capital (the percentage rate).
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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