Question

600-1000 words Using your own words (do not cut and paste an example from another source)...

600-1000 words

Using your own words (do not cut and paste an example from another source) please state and explain the computational steps of a Net Present Value (NPV) calculation. What information does NPV provide a management team of a business and what kind of decision is made by management when it considers a project’s NPV?

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Answer #1

Net Present Value (NPV) is the difference between the present value of cash inflows and cash outflows of an investment or project proposal.

It is calculated as follows:

Net Present Value (NPV) = Present value of cash inflows - Present value of Outflows

Present value of cash inflows is computed and the outflows are deducted from it. It provides information on profitability of the project proposal. It assists the managers to take capital budgeting decisions. Net Present Value method helps the managers to decide whether to accept or reject the project. If the NPV is positive, the project can be accepted. If NPV is negative, the project is to be rejected.

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