Net Present Value ( Npv ) - 1530 Words

Net present value (NPV) is a discounted cash flow technique used to determine the overall value of a project or a succession of cash flows (Blocher et al, 2008). See Appendix 1 for a simplified calculation. Belli (2001) argues that NPV is more suitably applied to mutually exclusive projects; these types of projects are those that if accepted, prevent other contending projects to be approved (Mowen et al, 2009). NPV is understood to be an absolute measure, therefore when selecting between mutually exclusive projects, the project with the highest NPV tends to be the most desirable (Damodaran, 2010). NPV is a popular appraisal technique, largely owing to its ability to consider the concept of time value for money. This alone provides a more†¦show more content†¦However, if the projects are mutually exclusive IRR is argued to be problematic and not the most effective technique. Ranking projects according to desirability can be flawed due to the inferred reinvestment rate assum ption of IRR and/or due to projects being of varying size and duration (Fisher, 1930). One of the most cited problems with IRR appears to be the fact that a cash flow stream can have no internal rate of return or numerous, inconsistent internal rates (White et al, 1998). This particular drawback is epitomised in Lorie and Savage s (1955) oil-well problem. They found that investing in advanced oil pump equipment to extract large quantities of oil at a faster pace could cause negative incremental cash flows. Moreover, it increased the total recovery and shifted some of the oil that had been recovered to date, to earlier periods; this caused the cash flow pattern to fluctuate between negative and positive. These problems caused them to state that, the rate-of-return criterion for judging the acceptability of investment proposals is ambiguous or anomalous (Lorie and Savage, 1955, p228). Payback period is defined as the expected number of years required to recover the original investment (Brigham Ehrhardt, 2005, p347). The payback period is calculated by cumulatively adding the net cash flows of a project. Projects with a shorter payback period are generally considered the most desirableShow MoreRelatedCompare and contrast the internal rate of return (IRR) and the net present value (NPV) criteria for evaluating investment proposals.2568 Words   |  11 PagesThe internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals. The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to takeRead MoreNet present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation2931 Words   |  12 PagesAbstract This essay will discuss the net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true. Introduction To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal asRead MoreDiscuss Net Present Value (NPV) Payback has certain advantages, but disadvantages for long term project appraisal. Discuss.1285 Words   |  6 Pagesdiscounted cash flow (DCF) methods using Net Present Value and Internal Rate of Return. NET PRESENT VALUE (NPV) Net present value is a way of comparing the value of money now with the value of money in the future. A euro today is worth more than a euro in the future, because inflation erodes the buying power of the future money, while money available today can be invested and so grow. The technique is a three-stage process: to calculate the present value of each element of cash expenditure in aRead MorePlease compare the advantages and disadvantages of the following investment rules: Net Present Value (NPV), Payback Period and Discounted Payback Period981 Words   |  4 Pages Net present value is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of moneyto appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. The advantages of the NPV are following; first, it tells whether the investment will increase the firm’s value. Also, it considers all the cash flowsRead MoreChapter 7— Net Present Value and Other Investment1149 Words   |  5 Pagesmanagers Chapter 7— Net Present Value and Other Investment Question 1 : List the methods that a firm can use to evaluate a potential investment. There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are 1) Net present value: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost. NPV = Present value of cash inflow- Present value of cash outflow TheRead MoreGroupe Ariel Sa Case Essay1170 Words   |  5 PagesGroupe Ariel SA Case Introduction Groupe Ariel SA of France is considering a project in Mexico. They need to analyze the net present value of the project, keeping in mind the exchange rates between Mexican Pesos and Euros in order to maximize their return. They also need to keep in mind the inflation rates over time and the risks involved with this type of investment. Analysis Number 1. Groupe Ariel is recycling old equipment in Mexico. They will need to use pesos to calculate their cashRead MoreLockerheed Tristar Case Study1587 Words   |  7 Pagesregarding these methods, with the most commonly used being Internal Rate of Return (IRR) and Net Present Value (NPV). Each method encompasses positives and negatives; however if either are used without fully understanding what their prospective results reveal, mistakes can be made and under-estimations of return will happen. In a recent case Lockheed Martin chose to use the Internal Rate of Return to value their Tri Star project. We have determined this to be a mistake and, through this case analysisRead MoreThe Divergence Of Opinion From One Technique850 Words   |  4 Pagestwo projects versioning alpha and beta, Identifying potential projects as part of their strategic planning process, amongst different techniques of gauging project, Phyllis adopted two techniques they are: 1. Weighted Scoring Model 2. Performing Net Value Analysis Weighted scoring model in the current scenario explains us that project beta is the best scoring project, which is recommended to adapt by the company, whereas in depth if we look on to the individual score according to their ProminenceRead MoreIntroducing The Internal Rate Of Return1263 Words   |  6 PagesTHE INTERNAL RATE OF RETURN (IRR) The Internal Rate of Return (IRR) is that discount rate providing a net value of zero for a future series of cash flows. The IRR and Net Present Value (NPV) are used to decide between investments to select what investment should provide the most returns. DIFFERENCE BETWEEN THE NPV AND IRR The main difference is that the Net Present Value or Net Present Value (NPV) is used as actual amounts, while the IRR is the interest yield as a percentage expected from an investmentRead MoreEssay on Capital 20Budget 20Analysis 20Group 20P1648 Words   |  7 Pagesis implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the salvage values before and after sales tax values along with the different sale ranges. Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline, conventional cash flow