Question

Explain the salient features of the present value method of project evaluation and

examine its rationality.​

Answer 1

Answer:

Explanation:Advantages of the Net Present Value Method

The most important feature of the net present value method is that it is based on the idea that dollars received in the future are worth less than dollars in the bank today. Cash flow from future years is discounted back to the present to find their worth.

The NPV method produces a dollar amount that indicates how much value the project will create for the company. Stockholders can see clearly how much a project will contribute to their value.

The calculation of the NPV uses a company's cost of capital as the discount rate. This is the minimum rate of return that shareholders require for their investment in the company.

Answer 2

Answer:

The difference between the current value of cash inflows and withdrawals over a period of time is known as net present value (NPV). To evaluate the profitability of a proposed investment or project, NPV is used in capital budgeting and investment planning. Calculations to determine the present value of a future stream of payments yield the NPV.

Explanation:

Advantages

• The time value of money is handled by NPV. The project with later cash inflows will be rejected if the cash inflows occur sooner in the present than in the future. Because the same amount of money acquired earlier has a higher worth than the same amount of money earned later, this is consistent with temporal value.
• NPV considers all factors of an investment, including time, risk, inflows, and outflows. Consequently, it is a complete strategy.
• NPV not only displays every aspect of the investment but also the profits from a certain project. As a result, it is simpler to comprehend the precise impact of investments and the cash influxes and egresses of a project.

Limitations

• In NPV, picking the appropriate discount rate is crucial. The NPV will be negative for higher rates and positive for lower rates. Therefore, estimating the rate is difficult and difficult.
• In the case of NPV, two distinct projects cannot be compared under a single heading. Different NPVs for two projects must be calculated given the date, time, and risk.
• While calculating the NPV of a project, numerous assumptions must be made, and occasionally, some assumptions may be incorrect. This will produce a false result, further off-setting the computation process.

Hence, we can conclude that while using the NPV method for capital budgeting , we choose the project with the highest NPV.

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