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NPV of future investments

Do you agree or disagree with the following statement:

"We can calculate future cash flows precisely and obtain an exact value for the NPV of an investment." Explain.

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Solution Preview

There is no way to determine the future for any human being. So the above statement is patently wrong. However, a firm can FORECAST its best view of the future in terms of the investment being under taken, and calculate the resultant NPV from the projection of figures related to the actual investment.

For example, let's assume we are looking at two different investment options for 5 years as follows:

Investment A Investment B

Investment $100,00 $100,00

Year 1 return 20,000 0
Year 2 return 40,000 0
Year 3 return 40,000 ...

Solution Summary

This solution provides a brief discussion on why the inclusion of calculations of net present value are not precise and predictable.