Net Present Value

• What is discounting 


  discounting is the method used to reduce the future value of cash flows to reflect the risk that they may not happen
• calculation for present value


  cash flow x discount factor
• benefits

  -consider all future cash flows

  -reflects the risks that future cash flows will not be as expected

  -different levels of risk can be accounted for by adjusting the discount rate

  -creates a straight forward decision
• drawbacks 


  -most complicated method compared with payback and ARR

  -choosing discount rate is hard for long projects

  -results can be manipulated using the discount rate