Page 47 - FM Integrated WorkBook STUDENT 2018-19
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Investment appraisal – Discounted cash flow techniques
3.4 Advantages and disadvantages of NPV
Does consider the time value of money Fairly complex
A measure of absolute profitability Not well understood by non-financial
managers
Considers cash flows It may be difficult to determine the cost of
capital
Considers the whole life of the project Only considers the long-term, so may
lead to short-term demotivation
A company selecting projects on the
basis of NPV maximisation should
maximise shareholders’ wealth
The technique can easily account for risk
3.5 Use of present value tables
-n
The discount factor (1 + r) can be calculated or looked up in present value tables
given in the exam.
On the present value table, look along the top row for the interest rate and down the
columns for the number of years, where the two intersect you can read off the
discount factor.
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