PM - Unit 4
PM - Unit 4
PM - Unit 4
Project Appraisal
3. Net Present Value: Net Present Value (NPV) is one of the techniques for the
appraisal of the project. The NPV of a project is the sum of the present values
of all the cash flows-positive as well as negative that are expected to occur
over the life of the project. It is the difference between the total present value
of expected future cash flows and initial investment. It is the difference
between discount benefits and discounted cost of the project. If the Net
Present valve is positive, the project will be selected and otherwise it will be
rejected. It introduces the time value of money and inflation. It also gives
accurate profit and loss forecast but it excludes non financial data like market
potential.
Decision Rule:
The NPV decision rule is to accept all the possible NPV projects in an
unconstrained environment, or if projects are mutually exclusive, accept the
one with the highest NPV. If the NPV is zero, it is a matter of indifference.
Limitations of NPV Method:
The NPV is expressed in absolute terms rather than in relative terms. It
does not factor in the scale of investment.
The NPV rule does not consider the life of the project. Hence, when
mutually exclusive projects with different life are being considered, the
NPV rule is based in favor of the higher term project.