Net Present Value (NPV) as a Capital Budgeting Method
Article: https://www.thebalancesmb.com/net-present-value-npv-as-a-capital-budgeting-method-392915
BACKGROUND:
Explain how Companies are constantly considering new capital investments including purchasing a piece of new equipment, opening a sales office in a new region, or purchasing another company. Companies often have more potential projects than they can afford. To choose between the potential projects, companies use Capital Budgeting. This article discusses the most sophisticated Capital Budgeting method which calculates each project’s Net Present Value.
REQUIRED:
1) Click on the link to read the article, Net Present Value (NPV) as a Capital Budgeting Method.
2) Create a Word document to answer the following questions:
a) According to the author, which projects are best suited for using the NPV method?
b) What does the author mean by the phrase “Mutually Exclusive Projects”?
c) What are the two rules of NPV identified by the author?
d) When describing the disadvantages of NPV, what Risk does the author discuss?
e) To mitigate the risk of developing a false sense of confidence, what three types of NPV scenarios does the author recommend that companies prepare?
f) What alternative method does the author recommend for short-term projects?
g) Previously, you prepared a Reflection Paper on using the Discounted Cash Flow Method for evaluating the value of a business. What similarities are there between the Net Present Value method and the Discounted Cash Flow Method?
