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What are the advantages of the NPV method used to evaluate capital projects?

What are the advantages of the NPV method used to evaluate capital projects?

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Answer #1

The net present value method is a very popular capital budgeting technique where in the future cash flows of a project are discounted at a predetermined interest rate and the initial cost of investment is subtracted from it to arrive at the net value added by this project.

The first advantage of this method is that it evaluates the dollar value of the net gain by undertaking the project. The second advantage is that it takes into account the time value of money which changes over a period of time. The computation of net present value method takes into account both the cash inflows as well as cash outflows and hence it is considered an effective method provided a reasonable estimate can be made as to the cash flows and the discount rate.

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