Net Present Value

- If company undertakes investment project with positive NPV, the value of share holders wealth is increased by that NPV’s its consistent with shareholders objective to maximize the return on their investment.
- Its based on cash flows rather than profits, which are difficult to distort.
- Effects of inflation and taxation are properly taken into consideration.
- Risk and uncertainty can be incorporated into the NPV working i.e. by using sensitivity analysis, probabilities etc.

- A major problem in use of NPV is the choice of discount rate, it is generally accepted that rate to be used should be the cost of capital, but is in itself may be difficult to determine.
- Through risk and uncertainty can be incorporated into NPV workings i.e. by using sensitivity analysis and other models, but these models itself have limitations.
- The technique assumes that cash flows arise at the end of time period, but in reality its not true.
- The method ignores non-financial factors e.g. skills and competencies, customers satisfaction etc, which may equally important as other financial factors.