2. Why is it critical to take into account the cost of money in assessing the...

2. Why is it critical to take into account the cost of money in assessing the financial viability of multi-year programs? Explain what is Cumulative Present Value (CPV).

Expert Solution

To understand this question and answer this we first need to know some points on Financial Viability.

Financial Viability of a program is the ability to generate sufficient cashflows to meet its operating costs, debt commitments and fulfill its mission from a financial perspective.

Projects can be of multi-years to meet its expectation we need to have a cost of capital or required rate of return so that we can assess these projects that the cashflow it is expected to generate will be sufficient to meet its obligations or not.

The most important point in assessing any project from a financial viability perspective is the cost of money, because to finance any project we need funds which have some cost, to meet its future obligations we need to match that cost with the future cashflows generated from the project. hence it is critical to consider or take into account the cost of money while assessing financial viability of a project.

Cumulative Present value: If a program is a multi-year program which generates cashflows each year then the company can determine how much is the worth of those cashflows today, due to the time value of money the present value of future cashflows will be less than the actual cashflows which is known as present value of cashflows adding those present value of cashflows over year will result Cumulative Present Value of cashflows.

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