Page 102 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Net Present Value (NPV)

Advantages:

• The answer is stated in Rands (if you calculate a positive NPV it means the

value of the company increases by that amount)

• The time value of money is taken into account

• All cash flows are included

• Correct reinvestment assumption: Assumes that all cash received as a result
of the investment will be used by the company to yield a return equal to the

WACC. (Any cash received before the end of the project can be reinvested at
the WACC).

Disadvantages:

• Must know the cost of capital beforehand

• Absolute Rand amounts are not comparable between different size projects

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