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Examine and discuss the characteristics of NPV and the role that this method plays in capital investment decision making

Examine and discuss the characteristics of NPV and the role that this method plays in capital investment decision making. In addition, discuss the advantages of using this method instead of the other evaluation methods such as:

- Accounting rate of return (ARR) and payback period (PP)
- Internal rate of return (IRR)
- Appraisal methods in practice
- Dealing with risk- how managers evaluate the risk involved with projects by using sensitivity analysis and the concept of expected NPV. Managing investment projects.

Very important - Please provide a reference to a real company.

Solution Preview

Examine and discuss the characteristics of NPV and the role that this method plays in capital investment decision making.

Net Present value gives the value addition by the project. It is calculated by :
NPV= Present value of Future cash flows- Initial investments.
NPV plays a critical role in capital budgeting. It is the best method of evaluating the project. It has got following characteristics:
1) It is based on cash flows.
2) It uses time value of money.
3) It is based on wealth maximization principle.

In addition, discuss the advantages of using this method instead of the other evaluation methods such as: ...

Solution Summary

In this solution we highlight the advantages of using the net present value method, as opposed to the accounting rate of return (ARR), the payback period (PP), and internal rate of return (IRR) methods. Additionally, it provides several reference sources.

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