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What Are The Advantages And Disadvantages Of Using NPV For Project Appraisal?

4 Answers

Lia Louis Profile
Lia Louis answered
NPV or net present value is a method for calculating cash flows, especially for discounted cash flow analysis and is a way to use the time value of money to appraise long-term projects.

NPV is the sum of all terms of cash inflow and outflow, which is discounted back to its PV or Present value. You’ll calculate the total of 1 plus the rate of return an investment and multiply it by the time of the cash flow. You’ll then divide that into the net cash flow, giving you your NPV.

There are numerous advantages to using the NPV. It is good for appraising long-term projects because it considers any potential future incoming cash flow. It will also measure the excess of cash flows. You’ll then be able to consider the risks of future cash flow and problems with overall net cash flow. NPV is an indicator of how much value is in a certain investment or project.

The disadvantages are significantly less than the advantages, but depending upon the application, you may choose not to go with NPV. One is that it does not take into consideration any intangible benefits that a company may experience for going with a certain project, including that of community outreach. Another is that if may not account for opportunity cost. If there’s any uncertainty or flexibility within the numbers, it is not taken into account with NPV either.

NPV can be very helpful for project appraisals, however if the project is for something that is not expected to turn a large profit, it may not be the best method to use. The higher the NPV, the more profitable the project. Ultimately, each project will have to be looked at individually before determining whether or not to use the net present value.
Anonymous Profile
Anonymous answered
Advantages:
-consider the time value of money
-consider risk of future cash flow
-consider all cash flows
disadvantages:
-do not consider the intangible benefis
-do not account for flexibility/uncertainty
Alishan Samdani Profile
Alishan Samdani answered
NPV is short for net present value, it is the present value of net cash flows. Its commonly used for appraisals on projects. The advantage of using NPV is that it tells you if a project will add or deduct value from the business and hence decisions are taken of whether to accept it or reject it. To view details of all the advantages and disadvantages of using NPV and alternative methods for NPV, please visit the following link.
NPV
Robert Lamp Profile
Robert Lamp answered

While useful NPV and IRR methods are useful methods for determining whether to accept a project, both have their advantages and disadvantages.

Advantages:

  • With the NPV method, the advantage is that it is a direct measure of the dollar contribution to the stockholders.
  • With the IRR method, the advantage is that it shows the return on the original money invested.

Disadvantages:

  • With the NPV method, the disadvantage is that the project size is not measured.
  • With the IRR method, the disadvantage is that, at times, it can give you conflicting answers when compared to NPV for mutually exclusive projects. The 'multiple IRR problem' can also be an issue, as discussed below.

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