NET PRESENT VALUE
MEANING
Net present value (NPV), also called net present worth (NPW), is an approach to evaluating investments that assesses the difference between all the revenue the investment can be expected to achieve over its whole life and all the costs involved, taking inflation into consideration inflation and discounting both future costs and revenue at an appropriate rate. It can be challenging to calculate NPV because it is not always clear what discount rates should be used.
3 POSSIBILITIES
POSITIVE NPV :
If present value of cash inflows is greater than the present value of the cash outflows, the net present value is said to be positive and the investment proposal is considered to be acceptable.
ZERO NPV :
If present value of cash inflow is equal to present value of cash outflow, the net present value is said to be zero and the investment proposal is considered to be acceptable.
NEGATIVE NPV :
If present value of cash inflow is less than present value of cash outflow, the net present value is said to be negative and the investment proposal is rejected.
OBJECTIVIES
understand the importance of explicity recognizing risk in the analysis of capital budegting process.
Discuss breakeven cashflow sensivity and scenrio analysis and unique risk facing multinational companies.
NPV CALCULATE
Net Present Value(NPV) is a formula used to determine the present value of an investment by the discounted sum of all cash flows received from the project. The formula for the discounted sum of all cash flows can be rewritten
1. It is based on the time value of money.
2. It considers the earnings or savings over the entire life of the project. These earnings or savings are converted into the present value of money.
3. It helps to make a comparative assessment of different projects.
4.Under this method, the highest net present value project is recommended for implementation. It leads to maximization of profits to the organization.
5. It can be applied to even and uneven cash inflows patterns.
6.The NPV method is generally preferred by economists. Hawkins and Pearce state that this method is theoretically unassailable. If one wishes to maximize profits, the use of NPV always finds the correct decision.
DEMERITS
1. This method does not indicate the rate of return which is expected to be earned.
2. This method may fail to give satisfactory answer when the projects are requiring different levels of amount of investment and with different economic life of the projects.
3. The application or usage of this method requires the knowledge of rate of cost of capital. If cost of capital is unknown, this method cannot be used.
4.The NPV method leads to confusing and contradictory answers in ranking of complicated projects.
5.Determining an appropriate discount rate is difficult in this method.
6.This method cannot be used for finding the number of years required to recoup the capital expenditure i.e. project amount.
CONCLUSION
Two basis concept ,future value and present value are introuced
interest rate are commonly expressed are annual based butb semi annual based,quartely,monthly,even countinous compound interest.
MEANING
Net present value (NPV), also called net present worth (NPW), is an approach to evaluating investments that assesses the difference between all the revenue the investment can be expected to achieve over its whole life and all the costs involved, taking inflation into consideration inflation and discounting both future costs and revenue at an appropriate rate. It can be challenging to calculate NPV because it is not always clear what discount rates should be used.
3 POSSIBILITIES
POSITIVE NPV :
If present value of cash inflows is greater than the present value of the cash outflows, the net present value is said to be positive and the investment proposal is considered to be acceptable.
ZERO NPV :
If present value of cash inflow is equal to present value of cash outflow, the net present value is said to be zero and the investment proposal is considered to be acceptable.
NEGATIVE NPV :
If present value of cash inflow is less than present value of cash outflow, the net present value is said to be negative and the investment proposal is rejected.
OBJECTIVIES
understand the importance of explicity recognizing risk in the analysis of capital budegting process.
Discuss breakeven cashflow sensivity and scenrio analysis and unique risk facing multinational companies.
NPV CALCULATE
Net Present Value(NPV) is a formula used to determine the present value of an investment by the discounted sum of all cash flows received from the project. The formula for the discounted sum of all cash flows can be rewritten
MERITS
1. It is based on the time value of money.
2. It considers the earnings or savings over the entire life of the project. These earnings or savings are converted into the present value of money.
3. It helps to make a comparative assessment of different projects.
4.Under this method, the highest net present value project is recommended for implementation. It leads to maximization of profits to the organization.
5. It can be applied to even and uneven cash inflows patterns.
6.The NPV method is generally preferred by economists. Hawkins and Pearce state that this method is theoretically unassailable. If one wishes to maximize profits, the use of NPV always finds the correct decision.
DEMERITS
1. This method does not indicate the rate of return which is expected to be earned.
2. This method may fail to give satisfactory answer when the projects are requiring different levels of amount of investment and with different economic life of the projects.
3. The application or usage of this method requires the knowledge of rate of cost of capital. If cost of capital is unknown, this method cannot be used.
4.The NPV method leads to confusing and contradictory answers in ranking of complicated projects.
5.Determining an appropriate discount rate is difficult in this method.
6.This method cannot be used for finding the number of years required to recoup the capital expenditure i.e. project amount.
CONCLUSION
Two basis concept ,future value and present value are introuced
interest rate are commonly expressed are annual based butb semi annual based,quartely,monthly,even countinous compound interest.