NPVAnalyse

NPVanalyse is a financial evaluation technique used to determine the value created by an investment or project by discounting expected future cash flows to their present value. The method subtracts the initial outlay from the sum of discounted cash inflows; the result, the net present value (NPV), indicates whether a project is expected to increase shareholder wealth under the chosen discount rate.

The standard procedure requires estimating future cash flows, selecting an appropriate discount rate that reflects time value of money and project risk, and applying the present value formula to sum discounted inflows. A positive NPV suggests the investment should increase value and may be accepted, while a negative NPV indicates value destruction. When comparing mutually exclusive projects, the one with the highest positive NPV is typically preferred.

NPV analysis is widely used in capital budgeting, corporate finance, infrastructure appraisal, and private investment decisions because it provides an explicit measure of expected value addition and accommodates differing timing and magnitude of cash flows. Variations and complementary techniques include sensitivity analysis, scenario analysis, NPV profiles, and real-options adjustments to account for managerial flexibility.

Limitations include dependence on the accuracy of cash flow forecasts and the chosen discount rate, potential difficulty in estimating non-financial benefits or strategic value, and challenges in comparing projects of different scale or timing. Despite these caveats, NPV remains a central tool for systematic investment appraisal.