Net Present Value Project Evaluation Essay

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Total Length: 952 words ( 3 double-spaced pages)

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Background



My company is considering a certain project undertaking. Our CFO is uncertain on whether or not to embrace the project. Having estimated the cash flows and NPV for the project, and having an estimated NPV as +$10, I am tasked with the role of analyzing the feasibility of the said project on the basis of the cash flows and NPV estimates. In so doing, I will address the kind of analysis I would make use of to make a case for or against the project and how I would justify my decision.

Discussion



It is important to note, from the onset, that businesses must ensure that all decisions made with regard to investments are sound. This is more so the case given that in addition to most projects requiring significant capital outlay, once a project commences, it could be quite expensive (or in some instances impossible) to abandon midway. The relevance of making sound investment decisions cannot, therefore, be overstated.



To determine the viability of projects, and hence make a business case for such undertakings, there is need for a deliberate screening process that typically utilizes various appraisal and evaluation methods. The method or approach that I will be taking into consideration as I seek to make a business case for Project X is the net present value (NPV). Payback period will be mentioned as an additional reference point.

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It is, however, important to note that there are many other methods businesses utilize in project appraisal and evaluation. These include, but they are not limited to, the internal rate of return (IRR) and the return on capital employed (ROCE).



The Net Present Value (NPV), in essence, seeks to analyze a projected or proposed project’s profitability. The parameters used in the computation of NPV are the present values of cash outflows and cash inflows, with the difference between the latter and the former being the net present value. In our case, the estimated net present value was +$10. It is important to note that the NPV value could either be negative, positive, or zero. Project X’s has a positive NPV value. A positive net present value, in the words of Crosson and Needles (2013), means that “the rate of return on the investment will exceed the company’s minimum rate of return, or hurdle rate, and the project can be accepted” (p. 371). In that regard, therefore, Project X could be regarded a viable investment. The positive NPV in this case means that the present value of cash inflows is higher than that of cash outflows. The estimated NPV of +$10 essentially represents a net gain during the period of investment. The figure was arrived….....

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References

Crosson, S.V. & Needles, B.E. (2013). Management Accounting (10th ed.). Mason, OH: Cengage Learning

Dhiensiri, N., & Balsara, N. (2014). An Introductory Application of Monte Carlo Simulation in Capital Budgeting Analysis. Journal of Financial Education, 40(1/2), 94–114.

Li, G., Hsiao, P. & Li, D. (2015). The Impact of Financial Risk on Business Risk. International Journal of Business, 20(4), 279–290.

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