Net Present Value (NPV)
The Net present value is as the difference between the prevailing present value of the cost inflows and the present value of the cash outflows. As Ross (2013) states in his book, a project should be accepted if the NPV is greater than zero and rejected if it is less than zero. This is known as the NPV rule. When computing the investment net present value, the cash flows going on at unique factors in time are adjusted for the time cost of money the usage of a reduction rate this is the minimum fee of return required for the project to be proper. Initiatives with nice net present values (or values as a minimum same to 0) are suitable and initiatives with negative internet present values are unacceptable. In case the investment is rejected, it’s rejected due to the fact cash flows will also be negative. Alexander (2000) states that any financial asset with an NPV greater than zero is referred to as underpriced, while any financial asset with an NPV less than zero is said to be overprices
The npv is computed as follows:
C – the coins waft generated in the particular length,
n – time index
N – the closing duration while coins flows take place
r – relevant cut price price
Note that better npvs are extra acceptable. The unique choice rule for npv is as follows:
Npv ? 0, reject mission
Npv ; 0, accept challenge
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The main advantage with the net present value technique according to Ross (2013) is that is uses cash flows, it includes all the cash flows of the project and that it rightly discounts the cash flows properly.
The main disadvantage to the net present value approach is that it is sensitive to discount rates. It excludes the value of any real options that can consist within the investment and it doesn’t take acknowledgement to the size of a project.