ECONOMICS

Detailed explanation-1: -Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

Detailed explanation-2: -Capital Budgeting Decision Rules. The recommended approach to any significant capital budgeting decision is NPV analysis. NPV = PV of the incremental benefits – PV of the incremental costs. When evaluating independent projects, take a project if and only if it has a positive NPV.

Detailed explanation-3: -The larger the NPV, the more financial value the project adds to our company; NPV gives us the project amount of value that a project will add to our company. Projects with a positive NPV add value, and should be accepted. Projects with negative NPVs destroy value, and should be rejected.

Detailed explanation-4: -The decision rule of NPV is to accept a project that has a positive NPV and reject a project that has a negative NPV. A positive NPV at a specified discount rate, indicates that the project is profitable as the initial cost can be compensated by the present worth of the future cash flows.