Accept or reject rule of npv, Finance Basics

Accept or Reject Rule of NPV

Under this method, a company should accept an investment venture if N.P.V. is positive that is if present value of cash outflows exceeds such of cash inflows or at least is equal to zero. Or NPV ≥0.  This will rank ventures providing the highest rank to such venture via highest NPV as this will provide the highest cash inflow or capital gain to the company.

Advantages of NPV

  1. It recognizes time value of money and that realizes such a shilling now is more valuable than a shilling tomorrow and the two (2) can simply be compared whether they are at their present value.
  2. It takes into account the complete inflows or returns and like it is a realistic gauge of a venture of the profitability.
  3. It is consistent along with the value of a share in so far like a positive NPV will contain the implication of increasing the value of a share.
  4. It is consistent along with the objective of maximizing the welfare of an owner since a positive NPV will rise the net worth of owners.

Disadvantages of NPV

  1. It difficult to employ.
  2. Its computation uses cost of finance that is a difficult concept since it considers both explicit and implicit where NPV avoids implicit costs.
  3. It is ideal for assessing the viability of an investment beneath certainty since it ignores the factor of risk.
  4. It may not provide good assessment of alternative projects whether the projects are unequal lives, returns or costs.
  5. It pays no attention to the PBP.
Posted Date: 1/31/2013 12:55:17 AM | Location : United States

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