Net Present Value Method

Project L:

9.09

49.59

60.11

NPV_L = $ 18.79

NPV_S = $19.98

If the projects are independent, accept both.

If the projects are mutually exclusive, accept Project S since NPV_S > NPV_L.

Note: NPV declines as k increases, and NPV rises as k decreases.

Advantages of Net Present Value

· Consideration of time value of money

· Consider the cash flow of the complete project. Therefore it helps to get a good idea about the project

· Simple and quick

· Consideration of the risk of the cash flow

Applicability of multiple discount rates

· Disadvantages of the Net Present Value method

· Difficult to determine the correct discount rate

· Difficult to forecast the cash flow for a long time