Can the net present value method of evaluating projects always identify the ones that will maximize...

Can the net present value method of evaluating projects always identify the ones that will maximize wealth? Why?

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Expert Solution

No, net present value (NPV) method is the method of evaluating projects or investments and not always identify the ones that will maximise wealth.

It provides better decision than than other methods making capital investments. It uses net present value of the investment project as base to accept or reject the proposal. Net present value method is difference between present value of cash inflows & present value of cash outflows that occurres the result of undertaking an investment project. It may be positive, negative or zero.

i) Positive NPV : It present value of cash inflow is greater than present value of cash outflow, NPV is said to be positive & project is to be accepted.

This will maximise the shareholder's wealth.

ii) Negative NPV : If presnet value of cash inflow is lower than present value of cash outflow, NPV is said to be negative & project is to be rejected. This will decrease the shareholder's wealth.

iii) Zero NPV : If present value of cash inflow is equal to present value of cash outflow, NPV is said to be zero & project is to be accepted. This will not impact shareholder's wealth.

jeff jeffy answered 6 months ago

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