Is net present value (NPV) the best investment technique? Why? Do you agree with this assessment?

Expert Solution

The net cash flows are determined and they are discounted back to present values. The project with the highest net present value is selected.

The biggest advantage of net present value is that it takes into account the present value that is money received today is worth more than money received tomorrow. In short it considers the time value of money.

Net present value gives company management a clearer picture of whether an investment will add value to the company. If the net present value has a positive value, it will add value and benefit the company’s shareholders.

It is used in making capital budgeting decisions. Net present value helps to find out if the projected future cash flows cover the future cost of starting and running a business. It helps to understand how much an investment or project is worth. It is because of all this, that net present value is the best investment technique. It gives a clearer picture in making capital budgeting decisions.

In case of any query, kindly comment on the solution

jeff jeffy answered 2 months ago

What are the Problems associated with the Net Present Value ("NPV") technique? Why do people use...

What are the Problems associated with the Net Present Value ("NPV") technique? Why do people use this, then?

The NPV (net present value) of Plan Alpha is $ (130,539) The NPV (net present value)...

The NPV (net present value) of Plan Alpha is $ (130,539) The NPV (net present value) of Plan Beta is $ 233,001 The IRR (internal rate of return) of Plan Alpha is $ 19.36 %. The IRR (internal rate of return) of Plan Beta is $ 21.25 %. Which plan, if any, should the company pursue? Based on the results above, the company should pursue Plan Beta because the NPV is positive and the IRR is greater than the company's...

7- Calculate net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why?

Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility...

Net present value (NPV)The net present value (NPV) rule is considered one of the most...

Net present value (NPV)The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.Consider this case:Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows:YearCash FlowYear 1$275,000Year 2$475,000Year 3$450,000Year 4$450,000Pheasant Pharmaceuticals’s weighted average cost of capital is 8%, and project Beta has the same risk as the...

1 A. What is the net present value (NPV) of an investment of $1000 that returns...

1 A. What is the net present value (NPV) of an investment of $1000 that returns $1500 in three years, using a discount rate of 10%? B. What is the NPV of a $5000 investment that is worth $10,000 at the end of five years, if we wanted to earn 15% on the investment?Did we earn our required 15%? How can you tell? C. What is the present value of a stock that pays a $1 dividend in perpetuity, if you...

1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...

1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2...

1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...

1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $475,000...

Explain why the net present value (NPV) generally leads to good investment decisions. (20 marks)

Explain why the net present value (NPV) generally leads to good investment decisions.

Find the net present value (NPV) of a project that requires an initial investment of $110,000...

Find the net present value (NPV) of a project that requires an initial investment of $110,000 and provides cash flows of $13,500 per year for 15 years? The investor’s required return is 18.5%.

(a) Calculate the net present value (NPV) of a project which requires an initial investment of...

(a) Calculate the net present value (NPV) of a project which requires an initial investment of $243,000 and it is expected to generate a cash inflow of $58,000 each month for 12 months. Assume that the salvage value of the project is zero. The target rate of return is 12 % per annum. (b) An initial investment of $8,720 thousand (i.e. × 1,000) on plant and machinery is expected to generate cash inflows of $3,411 thousand, $4,070 thousand, $5,824 thousand...

Question

Is net present value (NPV) the best investment technique? Why? Do you agree with this assessment?

Solutions

Expert Solution

Related Solutions