Net present value (npv), Financial Management

Net Present Value (NPV) :

In this technique, future cash flows are discounted to the present and then compared with the investment outlay. The basic discount rate is generally the cost of capital to the enterprise.  For ranking the projects along with this procedure, the NPVs of several another projects are compared. Project with highest positive NPV or a project with highest NPV is given highest rank.

Accept-Reject Rule:

In the case of independent projects, if the present value of cash inflows of a project is higher than the present value of investment outlay of the project, it should be accepted. if not, it should be rejected. In the case of equally exclusive projects, a project with highest NPV should be accepted.

Advantages:

  • Where a company has many mutually exclusive projects in hand, this method assists the management to choose the most profitable one.
  • It is simple to catch

Disadvantages:

  • It does not take into consideration the magnitude of the investment outlay and net cash benefits together.
Posted Date: 10/15/2012 9:24:20 AM | Location : United States







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