Merits and Demerits of Net Present Value (NPV)

NET PRESENT VALUE (NPV)

Net Present Value is the difference between the total present value of future cash inflows and the total present value of future cash outflows. NPV is calculated using the Time-gap and the Required rate of return. It is one of the methods for evaluating the project proposals.

MERITS OF NET PRESENT VALUE (NPV)

  • It recognizes the time value of money.
  • It is the best method for the selection of mutually exclusive projects.
  • It considers the total benefit arising out of the proposal.
  • It helps to achieve the maximization of shareholders wealth.

DEMERITS OF NET PRESENT VALUE (NPV)

  • It is not suitable for the project having different effective life tenures.
  • It is difficult to understand and calculate.
  • It needs discounting factor for calculation of present value.

ACCEPT AND REJECT CRITERIA FOR NPV

  • If NPV>0, Project is accepted,
  • If NPV<0, Project is rejected and
  • If NPV=0, Project may or may not be accepted.
Merits and Demerits of Profitability Index

Merits and Demerits of Profitability Index