NPV Concept
We want to
calculate the net of present values. The present value concept is explained in
terms of time value of money i.e. future payment is discounted to get the
present value.
What is positive net present value?
The present
value is the amount by which the share holder will increase today. Therefore if
the NPV is positive then we accept the project and if the NPV is negative then
we will reject the project.
What are advantages of NPV?
The most important the advantage NPV takes into account the
time value of money. It provides information about how much the shareholder
will increase. The other advantage it is based on cash flow which is less
manipulative in nature.
What are disadvantages?
The is calculated in absolute term and therefore it is not
comparable. It involves complex calculation and therefore difficult to
understand.
