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Essay / Research Paper Abstract
This 9 page paper critiques the use of the net present value (NPV) investment assessment tool, looking at the advantages and disadvantages associated with the approach and compares NPV to other potential techniques which may be used to assess investments. The bibliography cites 10 sources.
Page Count:
9 pages (~225 words per page)
File: TS14_TENVPassmt.rtf
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Unformatted sample text from the term paper:
present value (NPV). This is a tool that takes the future cash flows of a project and then discounts then to todays value by taking inflation and interest rates into
consideration or other capital costs. However, when looking at which methods to use for the assessment of capital investment the NOV should be considered against other forms of investment assessment
tools. The value of this tool is in the simplicity of the results as it can translate a figure into the future
revenues streams into a single figure which can be used tom make comparisons. This can be indicative of another main advantage; that of an easy to understand output that can
be used easily and does nit need specialist knowledge for a comparison to be made. However, there are some current disadvantages with
this type of calculation. The first is that to use this tool there need to be assumptions, such as assumption of the interest rates, cost of capital and/or inflation rates.
Small changes in any of these assumptions can lead to significant differences in the final figure. This may be a disadvantage, but it can also be utilised to increase the
value by adjusting the discount factor to allow for other costs or factors. For example, if the project has a higher risk then a higher return may be required in
order to make the project or investment feasible to allow for the risk and return equation to balance itself with the rate inducing the risk premium (Nellis and Parker, 2006).
If a safe project and a risky project have the same potential return then it may be argued as foolhardy for the
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