# (Updating) Consulting Cases - Investment

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### NPV (Net Present Value)

Only investments with a positive NPV should be considered

### CAPM (Capital Asset Pricing Model)

#### Usage

determine an appropriate rate when making NPV calculations.

#### Calculation

r = rf + β(rm – rf)

• r = Discount rate
• rf = Risk-free rate of return - Return Rate that can be received with a risk-free investment like U.S Treasury Bills
• rm = Market rate of return - Return Rate that can be received by investing in a diversified portfolio (S&P 500)

#### β

Beta of the Investment - a measurement of the risk of an investment compared to the risk of the market as a whole.

• β>1: Investment has more risk than the market. Example: For an investment with a β = 1.29, a 1% increase in the market means a 1.29% increase in the investment value.

• 0<β<1: Investment will tend to move in the same direction as the market. The asset is not as sensitive to market movements. Example: For an investment with a β = .75, a 1% increase in the market means a .75% increase in the investment value.

• β=0: The investment is not correlated with the market. “Risk-free” assets have β of 0.