Posted: September 13th, 2017

Net Present Value

Net Present Value

Project description
READ THE BELOW AND IN 250 WORDS DISCUSS.
When determining the value of a project, management often come across challenges. Because the value of dollar changes with time, the current value of a dollar won’t be

the same in the future. The net present value is a method to use when attempting to account for those changes in future dollar value. “The NPV method tells us the

amount by which the benefits from a capital expenditure exceed its costs” Parrino, 2012.

As discussed the value of any asset is the present value of its future cash flows. When considering a valuation model, these are the recommended steps when valuing an

asset whether real or financial:

1.
Estimate the future cash flows.

2.
Determine the required rate of return, or discount rate, which depends on the riskiness of the future cash flows.

3.
Compute the present value of the future cash flows to determine what the asset is worth.

This is the capital budgeting technique that is recommended from our readings . This will allow management to make the most of the challenges when figuring out the

financial strategies surrounding a new project.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley

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