Scribd
Upload
676 views2 pages

Characteristics of NPV and The Role That This Method Plays in Capital Investment Decision Making

Examine and discuss the characteristics of NPV and the role that this method plays in capital investment decision making. In addition, discuss the advantages of using this method instead of the other evaluation methods examined this week.

Uploaded by

AboliChitre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
676 views2 pages

Characteristics of NPV and The Role That This Method Plays in Capital Investment Decision Making

Examine and discuss the characteristics of NPV and the role that this method plays in capital investment decision making. In addition, discuss the advantages of using this method instead of the other evaluation methods examined this week.

Uploaded by

AboliChitre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

According to Atrill and McLaney (2012), ARR, PP, NPV, IRR are the methods

to evaluate investment opportunities.


NPV can be regarded as an advanced appraisal tool which calculates the
inflow and outflow of cash and derives whether there is an excess or a shortfall in the
organization. One simple rule as long as NPV is positive, the project should be kick
started. Striking feature of NPV is equation between discount rate and NPV is
inversely proportional. Hence companies are obsessed with lowering their discount
rates at all times. According to Harvard Business Reviews article, this has been the
most preferred method especially in investment opportunities for two main reasons
firstly, there is unbiased reflection of value of money over period of time (Gallo,
2014). Hence the future cash flows can be witnessed as present cash. Secondly,
managers are able to draft a reliable comparison between the rate of return and the
present value of the product/service (Gallo, 2014). This makes it easier to decide on
stocking of inventory in the company.
Advantages of NPV over the aforementioned methods (Atrill and McLaney,
2012):
1. The value of money over time is highly considered priority is given to the
opportunity that can generate highest returns. Also, financial issues and
companys objectives can be reflected by NPV. The quotient of discount rate
gets altered according to the risks, yield and opportunity costs.
2. All relevant cash flows are considered the time period as to when these cash
flows occurred is relevant according every single case. Each cash flow is taken
into consideration whilst maintaining their actual date of event (Armeanu and
Lache, 2009). Due to this, each of the special case has an effect over the
decision making process.
3. Determines the decision making process with the main objective of
increasing business owners wealth, positive NPV gives a green signal to
proceed with the project. Negative NPVs indicate a danger sign of reducing
the money quotient.
A startling example of NPVs use is in the case of Greece and its debt situation.
In blog for Reuters, Hadas (2015) mentions the biggest mistake being committed
by the country is to ignoring NPV to value their bonds. The interest rate was
reduced to a level during initial negotiations between EU countries, that the real
value of the bonds is almost diminished. As unwilling are the politicians to accept
the fact, the truth is they have digested a humongous reduction in the NPV. The
matter has gone beyond the calculations of NPV and political instability and
corruption have taken its place.
This live example reflects the importance of evaluating the assets time to time
through NPV and having a concrete forecast of risks and dangers for a company
or a country.

REFERNCES:
Armeanu, D, & Lache, L 2009, 'THE NPV CRITERION FOR VALUING
INVESTMENTS UNDER UNCERTAINTY', Economic Computation & Economic
Cybernetics Studies & Research, 43, 4, pp. 143-156.
Atrill, P & McLaney, E. (2012) Management Accounting for Decision Makers. 7th ed.
Harlow, England: Pearson Education Ltd.
Gallo, A., 2014. A Refresher on Net Present Value. [Online]
Available at: https://hbr.org/2014/11/a-refresher-on-net-present-value
[Accessed 14 February 2015].
Hadas, E., 2015. The redundant fictions of Greek debt. [Online]
Available at: http://blogs.reuters.com/edward-hadas/2015/02/04/the-redundantfictions-of-greek-debt/
[Accessed 14 February 2015].

You might also like