NPV
Concept
NPV stands for net present
value of revenue and associated cost. This concept is widely used in discounted
cash flows, where cash inflows (revenues) and cash flows are discounted and net
value of this discounting is use for investment decision making.
NPV
Discount Rate
Cash flow is discounted
with the help of a discount rate. This discount rate is the cost of capital of
investment. It means that discounted is done by expected rate of return from
investment. NPV and discount rate has inverse relationship i.e. a high discount
rate would result in lower NPV, while a lower discount rate would result in
high NPV.
NPV
Decision Rule
NPV decision rule is very simple
and straightforward. If npv is positive or zero, then investment is accepted,
otherwise it is rejected. It is important to remember that NPV provide a
financial measure only for investment decision.
NPV
Assumptions
NPV cash flows assumption
may be explained in terms
·
All cash flow is considered to occur at
year end.
·
Cash flow occurs at early stage of a period
is deemed to occur in previous year.
·
Period may be divided and discount rate may be
adjusted for accuracy.
