NPV and Mutually Exclusive Investments

[@saraelia7155]

Thank you, I understood the explanation. I have a doubt though. Once I was given a problem I couldn't solve; it was a choice between mutually exclusive investments. Basically, I had to choose between two alternatives. I was told that the investment would last 30 years and, at the end, the asset would be worth 0. Then, they gave me the information to calculate the profit in one year. So, for example (I'll use simple numbers), I buy a barn for $2000, then I have to choose between buying a meat cow or a milk cow. Then, I have the cost of each cow, their number, their life expectancy, the amount of meat and milk they produced (plus how much milk was needed to make cheese), the price of a kilo of cheese and meat, the price of food for each cow etc. Basically, I would have been able to calculate the profit in year one, after determining the revenue and costs associated with each choice. However, the problem is not solved in this way. I know that I should have used the NPV (they confirmed it too) but I don't know how. My main questions are: 1. What should I do, when I have a long investment, to calculate the formula on my own (without excel). Wouldn't it be too long? 2. Why did they specify that the asset would be worth 0 at the end? Did they mean the barn? How do I use that information? 3. How can I use the NPV formula without CFs (which I realize are different from profit in year one) and cost of capital? 4. I guess the cost of the barn would be the initial investment, but I am not sure about that either. And if it is possible somehow to go from profit to CF (I am trying to look up this information already) then it seems strange to assume that it is going to be the same each year for 40 years. This seems a fairly simple case and similiar to the kind of choices we would normally have to take in everyday life. However, I found it difficult to solve. I hope you can help me, I don't know where to find a guide for this type of problem.

[@heve6147]

Hello, question? How can ti be that the cost of capital is different? Thanks in advance

[@batmanrobin6711]

The cost of capital measures the cost that a business incurs to finance its operations. It measures the cost of borrowing money from creditors, or raising it from investors through equity financing, compared to the expected returns on an investment. BUT YES I DON'T KNOW EXACTLY WHY THERE IS A DIFFERENCE BETWEEN THE TWO PROJECTS.

[@msc.public]

About this video I have only one question. If the person decides to sell as-is, the $175 should not be corrected for the two years period to make it more comparable to the other projects? In short, I was thinking of investing the capital for two years in some kind of investment (savings account, stock, bonds, mutual funds, ETF, index funds, options or else)? Great explanation, by the way. Cheers!

[@vivilin4571]

Thank you for your lecture, explained so well!! are you a professor of finance?

[@Edspira]

+Vivi Lin No problem! I teach accounting at Washington University in St. Louis and am finishing up my PhD there as well. I have a background in finance and economics too so I hope to create videos for all these topics!

[@nathantaylormckenzie]

+Education Unlocked you are amazing

[@hinata5963]

Thank you so much!

[@bhagatsingh5019]

Thank you for your all beautifully explained videos.

[@zohanafees3978]

you are great !!!

[@Clifffffffffford]

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