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What type of Capital budgeting Financial decisions may call for the use of Net Present value...

What type of Capital budgeting Financial decisions may call for the use of Net Present value only and how may that increase the Net Present Value of that project.

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Answer #1

Situations where the Capital budgeting financial decisions may call for the use of Net Present Value only are:

1. When the investment decisions relate to purchase of physical assets or replacing a existing an asset, determining the NPV is essential to estimate the worth of the asset and the cash flows it will generate.

2. To choose between two mutually exclusive projects. NPV is essential in making the choice, the project with the highest NPV is chosen.

NPV of the project can be increased by decreasing the discount rate, estimating the cash flows for a lesser period of time.

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