Page 311 - SBL Integrated Workbook STUDENT 2018

Financial decision making

5.3 Net present value (NPV)

The Net Present Value (NPV) is the net benefit or loss of benefit, in
present value terms, from an investment opportunity. It represents the
surplus funds (after funding the investment) earned on the project, and
calculates the impact on shareholders’ wealth.

Decision criteria:

 A project with a positive NPV is viable.

 Faced with mutually-exclusive projects, choose the project
with the highest NPV.

Suitability This is best for long projects with a known costs of capital.

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