Investing · Lesson Plan

Using NPV for Investment Decisions

This capstone applies net present value to real capital-budgeting decisions. Students learn to base analysis on actual after-tax cash flows, total a project’s initial cost, compute incremental cash flow (added net earnings plus the tax benefit of added depreciation), and use the equivalent annual cost to compare projects with different lives — all worked through with detailed examples.

Grades 11–12 / College Lesson Plan 45–60 minutes Free Lesson

Using NPV for investment decisions lesson illustration

For Teachers

Lesson at a glance

Topic: Investing
Grade Level: Grades 11–12 / College
Resource Type: Lesson + Worksheet
Estimated Time: 45–60 minutes
Format: Lesson + worked examples
Materials: Printable lesson, worked examples, calculator

What Students Learn

Learning objectives

Base investment analysis on actual after-tax cash flows
Total a project’s initial cost
Compute incremental cash flow
Include the tax benefit of added depreciation
Use equivalent annual cost to compare projects with different lives

Materials

What you’ll need

Printed lesson with worked examples (one per student)
Calculator
Scratch paper
Whiteboard

Key Terms

Vocabulary

Capital budgeting: Choosing which long-term projects a firm should fund.
Initial cost: Purchase price plus added expenses, net of sale revenue and taxes.
Incremental cash flow: Added cash flow a new project brings over the existing one.
Depreciation tax benefit: Tax savings from the added depreciation of new equipment.
Equivalent annual cost (EAC): A way to compare projects with different lifespans.
After-tax cash flow: Cash flow measured after taxes are paid.

For Teachers

Lesson plan

Estimated time: one 45–60 minute class period.

Lesson sequence

Set the rules (8 min). Use actual after-tax cash flows, not accounting earnings.
Initial cost (12 min). Total price, added expenses, sale revenue, and taxes with the worked example.
Incremental cash flow (15 min). Added net earnings plus the added depreciation tax benefit.
Comparing projects (10 min). Use equivalent annual cost for different project lives.

Assessment

Assess the worked problems for correct initial-cost and incremental-cash-flow calculations.

Discussion

Discussion questions

Why base capital-budgeting analysis on cash flows rather than accounting earnings?
What goes into a project’s initial cost?
What is incremental cash flow, and how do you compute it?
How does depreciation create a tax benefit?
When would you use equivalent annual cost?

Printable Lesson & Worked Examples