Net Present Value (NPV)

Net Present Value (NPV) :- It is net present value of all the cash flows that occur during the entire life span of a project: The outflows will have negative values while the inflows will have positive values. Obviously, if the present value of inflows is greater than outflows, we get a positive NPV and if the present value of outflows is greater than inflows, we get a negative NPV. The positive NPV means a net gain in value maximization and, therefore, any project which gives a positive NPV is an acceptable project and if it gives a negative NPV, then the project should not be accepted. NPV can be expressed as follows;

Properties of NPV: - 

The NPV method is a very scientific and appropriate technique of capital budgeting and is therefore, widely used for investment decision making. The following properties can be identified.

It is based on cash flows over the entire life of project.

(i) It considers time value of money. 

(ii) It is an absolute value.

(iii) It possesses the property of additions, i.e. the total NPV of two projects is the summation of their individual NPVs. 

(iv) NPV for different rates of interest can be found separately, and 

(v) It allows different rates of interest for different time period in the life of a project.

Limitations of NPV 

It gives the absolute value and therefore, comparison between two different projects is not easy, especially when they are of different sizes.

(i) Many a times, it is not possible to know in advance the rate of interest at which discounting is to be done. Similarly a given NPV may not be appropriate if the rate of interest has changed. 

(ii) It may lead to wrong decision making especially when limited funds are available and we have to choose between different options. 

Subscribe on YouTube - NotesWorld

For PDF copy of Solved Assignment

Any University Assignment Solution

WhatsApp - 9113311883 (Paid)