7.9c Making Investment Decisions - NPV Flashcards
1
Q
NPV meaning
A
Net present value
2
Q
What is NPV based on?
A
The assumption that any money received by the business in the future would be worth less to the business than if it was paid today
3
Q
What does a discount table show?
A
The value of £1 at different discount rates now and in the future
4
Q
How do businesses reduce the value of future receipts?
A
By a set discount rate
5
Q
Advantages of NPV:
A
- Takes account of time value of money
- Looks at cashflows throughout life of project
- Decision making mechanism - rejects projects with a negative NPV
6
Q
Disadvantages of NPV:
A
- Difficult to select the most appropriate discount rate
- Sensitive to the initial investment cost
