NPV, Essay Example

NPV is the true measure of investment profitability, NPV do provide many acceptable rules. It does recognize the real time money value, it takes into considerations all the cash flows occurring over the life span of the investment calculating the it’s worth. The process of discounting cash flows does facilitate measuring the cash flows in terms of their present values. When NPV is positive an investor should make a decision to invest and vise versa. Net Present Value is the best because it has additive principle since we can have uneven cash flows for all investment period. Therefore, the value of the firm will increase as per the sum of NPVs. Additive principle enables a firm to evaluate each project independently, thus, decision for each project can be passed independently. This method is also consistent with the shareholders objectives of maximizing their wealth. For accountants and management, this method is simple to apply and understand if all values are unknown.

Reference

Arthur, S. & Sheffrin, S. M. (2003). Economics: Principles in action. New Jersey: Pearson Prentice Hall.

Pandey, I. M. (1999). Financial Management. 8^th Ed. New Delhi: Vikas Publishing House PVT Ltd.

Pareja, I.V.&Tham, J. (2009). Prospective Analysis: Guidelines for Forecasting Financial Statements. Retrieve, April 01, 2009, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=100