Question

How would you go about convincing an organization to dedicate time and effort to calculating NPV for decision-making purposes?

Answer 1

Net Present Value (NPV) is the gold standard analytic technique used in financial analysis and investment decision-making.

An organization should dedicate time and effort to calculating NPV for decision-making purposes because of several reasons Explained below :

• It takes account of time value of money, placing emphasis on earlier cash flows
• It looks at all the cash flows involved through the life of the project
• Use of discounting reduces the impact of long-term, less likely cash flows
  • It has a decision-making mechanism – reject projects with negative NPV
• It helps in Maximizing firms value

• In NPV Method Profitability & Risk of the projects are given high priority
• NPV method takes into consideration the cost of capital and the risk inherent in making projections about the future Cash flows that are projected further in the future have less impact on the net present value than more predictable cash flows that happen in earlier periods.

• The NPV method also tells us whether an investment will create value for the company or the investor, and by how much in terms of dollars.

• NPV calculate the monetary value now of the projects future cash flow

• NPV can handle multiple discount rates without any problems. Each year's cash flow can be discounted separately from the others making NPV the better method.
• net present value method is that it takes into account the basic idea that a future dollar is worth less than a dollar today. In every period, the cash flows are discounted by another period of capital cost.

From the above points it is clear that how important NPV Method is for decision making .so, time & efforts should be devoted in this for better future & growth of the organization