Question

Why Satey requirement may mandate an organization to accept Negative NPV investment ?

400words

Answer 1

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project

If NPV is positive, that means that the value of the revenues (cash inflows) is greater than the costs (cash outflows). When revenues are greater than costs, the investor makes a profit. The opposite is true when the NPV is negative. When the NPV is 0, there is no gain or loss.

The net present value (NPV) rule is essentially the golden rule of corporate finance that every business school student is exposed to in most every introductory finance class. The NPV rule dictates that investments should be accepted when the present value of all the projected positive and negative free cash flows sum to a positive number.

Sometime projects are required to meet legal or regulatory requirements, such as a significant sales tax change or to track and report various kinds of activities. Occasionally a company may perform a project to mitigate a risk. These will generally have negative NPV.

There are many reasons why this may be the case although not common. An example may be; if a company has a debt problem that must be addressed and is of highest priority to stay solvent, it may need to shift the capital that was assigned to the positive NPV project to resolving the debt problem.