Question

Why is NPV the decisive variable is that drives the decision to refinance a mortgage?

Answer 1

The obvious reason is that net present value method takes into account the basic idea that a future dollar is worth less than a dollar today. In every period, the cash flows are discounted by another period of capital cost.

The NPV method also tells us whether an investment will create value for the company or the investor, and by how much in terms of dollars.

The NPV method takes into consideration the cost of capital and the risk inherent in making projections about the future. In general, a projection of cash flows 10 years into the future is inherently less certain than cash flows projected next year. Cash flows that are projected further in the future have less impact on the net present value than more predictable cash flows that happen in earlier periods.