Project appraisal through discounted and non-discounted cash flow techniques - Essay Example

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The positive Net Present Value signifies that the project, asset, of any item being forecasted will generate positive cash inflows in future and project should be accepted an initiated if the decision only bases on financial grounds, the project will generate profits in the forthcoming periods if all other factors remained constant. …
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Project appraisal through discounted and non-discounted cash flow techniques
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Download file to see previous pages Positive and negative values makes it easy to understand generation of profits and losses as well as assists decision makers to focus only on the highly positive items, the precious time of management can be saved by focusing on the relevant project (Fortes, 2010; Horngren, 2005). Calculations are comparatively easy and data of any finite period can be easily converted into present value of it. Net present value analysis is derived from some basic realistic and practical assumption it is based on a fact that value of £100 today will be more than the worth of £100 after a year. Keeping this assumption in mind a net present value of future cash inflows is calculated using a discounted rate, usually the rate of cost of capital of a company or industry this rate represents the percentage minimum requirement of return by an organization per annum. Annuity factors can also be used if cash flows are constant every year.
The Net Present Value (NPV) is a useful technique to determine profitability of any item being assessed, but has few limitations as well, it only focuses on factual data that can directly hit the profit generation capabilities of an item and financial aspects only while appraising projects and does not account for the non financial aspects, areas and issue associated to that project; whereas, there is a high probability of any decision/ project to get affected by numerous external or internal non-financial events. ...Download file to see next pagesRead More
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