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What is net present value? What are its acceptance rules, their advantages and disadvantages?
Net present value (NPV) is a financing term which shows the cash flow worth for both inflow and outflow and it is been defined as the sum of the present values of cash flow. NPV is formulated as future cash flow subtracted from the purchase price. It is also the tool to calculate discounted cash flow and is a standardized method for the analysis of capital budgeting. The advantages and disadvantages of it are as follows:-
The advantage of NPV is needed for long term projects and it measures the excess or shortfall of cash flows as it is used for the reinvestment at the discount rate which is used for this.
The advantage is that the adjustment for this is a bit risky and it adds a bit of difficulty in making the cost higher.
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