LTC and NPV are two methods for evaluating a long term capital expenditure. Please describe a...

LTC and NPV are two methods for evaluating a long term capital expenditure. Please describe a situation where it would be better to use LTC instead of NPV, and then vice versa. Please be specific with the situations

Expert Solution

LTC and NPV are two methods for evaluating long term capital expenditure. LTC stands for Lowest Total Cost and NPV stands for Net Present Value. Both these concepts use the time value of money. NPV uses time value of money to find out the value of future cash flows in present time i.e. the future cash flows are discounted to get the total present value of those cash flows.

Lowest Total Cost uses the time value of money concept to find out the lowest total cost by discounting the future cash flows.

NPV is used when the business wants to find out whether ot will be profitable or not to invest in a business after subtracting the present value of the cash inflows from the present value of the cash outflows. If the value is positive then the investment is profitable. LTC on the other hand is used to find out only the lowest amount of money that has to be invested. There is no role of the inflows from the investment. Thus, it is only a one sided evaluation of the project.

NPV is used when we know about the cash inflows as well as cash outflows while LTC is used when the cash inflows are not known and only cash outflows are known.

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