If you have a Negative NPV are there some circumstances that might outweigh the NPV?

Expert Solution

NPV is the Net Present Value of an investment / project which helps in analyzing the decision of to invest or not to invest in that project. It is calculated by deducting the present value of cash outflow from the present value of cash inflow of a project which will be generated over the life of a project.

Yes. Inspite of having a negative NPV for a project / investment, there are other circumstances that have the effect of changing the investment decision. These circumstances are as below:

1. Strategic Importance of a project: In cases of project having strategic importance such as to become a market leader or to enhance the brand value of the company, inspite of a negative NPV, the project may be taken up.

2. Social Importance: The project having negative NPV but high social importance may be accepted. This may include investment in equipment to control pollution which might have a negative NPV but have high social values.

3. Adopting Innovation and latest technology: The market leaders always try to adopt new technologies in order to increase their brand value and to showcase to the competitors that they always have the latest technology. Although the NPV of such adoption may be negative but the projects are accepted based on their importance.

Hence, it is always important to analyze the other circumstances before taking a final decision based upon the negative NPV of any project / investment. The negative NPV although provides the probable loss from the project but it might have a positive impact on the brand value / have a positive impact on the company.

ekkarill92 answered 1 year ago

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