Question

In: Finance

Explain the reasons why the Net Present Value method is the most superior method of project...

Explain the reasons why the Net Present Value method is the most superior method of project evaluation.

Solutions

Expert Solution

NPV is superior method than all other methods in project evaluation due to the fact that NPV can handle projects with different sizes and projects with varying period of time.

NPV method employs more realistic reinvestment rate which is close to cost of capital.

NPV uses time value of money unlike payback period method.

NPV provides how much profit will generate by the project in real terms or exact numbers.

Hence NPV is superior than all other methods in capital project evaluation.


Related Solutions

Most financial experts will agree that net present value is the best capital budgeting method. Explain...
Most financial experts will agree that net present value is the best capital budgeting method. Explain why this is so and also explain how even NPV can be unreliable when projecting project results. Also Given the goal of maximization of firm value and shareholder wealth, we have stressed the importance of net present value (NPV). And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback...
Please explain why the net present value (NPV) method is preferred over the payback method when...
Please explain why the net present value (NPV) method is preferred over the payback method when evaluating alternative capital budgeting projects.​
Please explain why the net present value (NPV) method is preferred over the payback method when...
Please explain why the net present value (NPV) method is preferred over the payback method when evaluating alternative capital budgeting projects.​
discuss the reasons why net present value is used to make investment decisions.
discuss the reasons why net present value is used to make investment decisions.
Net Present Value Method, An index computed by dividing the total present value of the net...
Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.Present Value Index, and Analysis for a service company Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: Maintenance Equipment Ramp Facilities Computer Network Amount to be invested $679,831 $436,634 $209,605 Annual...
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...
Net Present Value Method, A method of analysis of proposed capital investments that uses present value...
Net Present Value Method, A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment.Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station 1 $360,000 $760,000 2 360,000 760,000 3 360,000 760,000 4 360,000 760,000 Present Value...
Net Present Value Method, A method of analysis of proposed capital investments that uses present value...
Net Present Value Method, A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment.Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station 1 $360,000 $760,000 2 360,000 760,000 3 360,000 760,000 4 360,000 760,000 Present Value...
Explain the net present value formula and also explain what the net present value represents.
Explain the net present value formula and also explain what the net present value represents.
evaluate the following project using the Net Present Value method. year                              cash flo
evaluate the following project using the Net Present Value method. year                              cash flow 0 investment                325,000 1 income                       90,000 2 add investment      20,000 3 income                     140,000 4 income                     125,000 discount rate                     9% NPV ____________        Go or No Go ___________ compute operating cash flow using three of the four methods Sales       400,000 Dep.        35,000 cost        250,000 Tax Rate        35%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT