Net Present Value assesses investment profitability by comparing present cash flows to costs. Essential in financial analysis, it aids decision-making by quantifying potential returns. Despite challenges, Net Present Value guides efficient resource allocation, maximising financial gains and strategic growth.
Methodology:
- Identify cash flows,
- Determine the discount rate,
- Calculate present value of cash flows,
- Sum the present values,
- Analyse the Net Present Value,
- Consider non-financial factors,
- Make informed decisions,
- Monitor and review.
Benefits:
- Accounts for time value of money,
- Facilitates objective investment decisions,
- Supports comprehensive financial analysis.
Limitations:
- Relies on accurate cash flow and discount rate estimates,
- May not fully capture non-financial factors,
- Complexity in calculating for large products.