A PRESENTATION ON NET PRESENT VALUE , ITS

CHARACTERISTICS AND LIMITATIONS

Presented by:- Junaid Hassan

NET PRESENT VALUEIt is the difference between the present value of

cash inflows and the present value of cash outflows .

NPV is used in capital budgeting to analyze the profitability of an investment or project. In other words, the amount invested is

compared to the future cash amounts after they are discounted by a specified rate of return.

Investments with a positive net present value would be acceptable. Investments with a

negative net present value would be unacceptable.

Steps to be considered :- The ist step is to estimate the

expected future cash flows. The second step is to estimate

the required return for projects.

The third step is the timing of the cash flows and ;

The fourth step is to find the present value of the cash flows and subtract the initial investment therefore we can get the Net Present Value.

ADVANTAGES OF NET PRESENT VALUE (NPV)

It tells us whether the investment will increase the firm’s value or not.

It considers all cash inflows. It considers time value of money. It is consistent with the objective of of maximizing

the welfare of the owners and maximizing the firm’s value.

LIMATATIONS OF NET PRESENT VALUE NPV is based on future cash flows and

the discount rate, both of which are hard to estimate with 100% accuracy.

It does not give a complete picture of an investment’s gain or loss.

Within the NPV method , the limitation is that the project size is not measured.

Prone to forecasting errors.