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Explain how to calculate the NPV (net present value) of an alternative. What is the decision...

Explain how to calculate the NPV (net present value) of an alternative.

What is the decision rule for adopting a project?

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Expert Solution

With help of NPV we can get today's value of a future stream of payments

To get the NPV, first of all we  determine the current value for each year's return , after that we use the expected cash flow. After that we divide it by the discounted rate.

Decision rule for adopting a project can be given as following types.

During decision-making process, we use the net present value (npv) rule to decide whether to pursue a project or not.

If the calculated NPV of a project is negative i.e. less than zero (< 0), the project is expected to result in a net loss. In this case it is not preferable to pursue project.

If calculated NPV of project is positive (> 0) i.e. greater than zero then the company can expect a profit .in this case it is advised to moving forward.

If a project's NPV is neutral (= 0), the project is not expected to result in any significant gain or loss for the company.

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milcah answered 1 year ago
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