NPV

• NPV?

  Calcs net cash flows for each year of useful investment life with consideration of discounted cash flows

  • return on assets over its life, expressed in present day values
• What is PV?

  value today of an amount invested for a fixed number of future periods for a given rate of interest per period
• negative NPV

  not accepted

  Expected target ROR = less than minimum ROR of company
• Positive NPV

  Accept

  Expected return = higher than target ROR
• ZERO NPV

  Accept

  Expect target ROR = TARGET rate = minimum acceptable return of firm
• advantages?


  applies time value of money -> future cashflows discounted to their PV

  All estimated cash flows over investment life are calculated

  Straightforward decision making (eg. NPV = 0+ , target return achieved)

  Calculates target return/ investment yield

  • Provides some financial risk of investment -> higher cost of capital = higher risk
• disadvantage


  difficult process to apply and explain -> calculation = complex to do and follow, especially when comparing

  Challenge applying right ROR

  Only life investments compared

  Hard choosing 1 investment over another (different purpose and nature)

  Assessing risk isn't easy -> basis: past judgement