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







Related Discussions:- Accept or reject rule of npv, Assignment Help, Ask Question on Accept or reject rule of npv, Get Answer, Expert's Help, Accept or reject rule of npv Discussions

Write discussion on Accept or reject rule of npv
Your posts are moderated
Related Questions
a debt off Rs1000 with interest at 10% compounded quarterly will be repaid by payments Rs. 200 at the end of 3 months and three equal payments at the end of 6 9 and 12 months. find

thew amount of money investedin a retirement fund is an example of

Accounting Rate of Return Method or ARR This method utilizes accounting profits from financial status to assess the viability of investment proposal via diving the average inc

Disadvantages of Payback Period 1. Does not receive into account time value of money and supposes that a shilling obtained in the 1 st year and in the N th year have the sim

if you won the publisher''s clearing house $10 million prize (payable as 30 pmts of $250,000 and $2.5m in yr. 30) and could invest the money at 8%, would you accept an offer of $3.

Computation of Payback Period Method 1. Under uniform annual incremental cash inflows - if the venture or an asset generates uniform cash inflows then the payback period (PB

Louis Futon Co. is currently an all-equity firm. The current market value of the company is $80 million. The corporate tax rate is 35%. What is the new value of the company if Loui

Below is information provided for two companies, A and B.  Assuming a risk-free rate of 2.5%, an effective tax rate of 40%, and a market risk premium of 5.5%, estimate th

The operating profit (EBIT) of ABC Ltd is Rs. 1,60,000. Its capital structure consists of the following: 10% Debentures Rs. 500000 12% Preference Shares 1

Production data has been fit to a Fetkovich type curve. Given the following information, answer the questions: Date of first production plotted for the Fetkovich type curve matc