The cash flow approach is concerned, it

The money you have today
is always an asset and it worth’s more than what it will be in the future, the reason
being the future is unpredictable to us (Gallo, 2014).
Maybe there is inflation or a sudden economic down turn. Secondly, the cash or
an asset you are holding today can be invested and you can earn more. So, to
estimate the financial worth of what you are holding today and what it will be
in the future, NPV is used (Gallo, 2014).

According to Hillier,
Ross, Westerfield, Jaffe & Jordan (2010) net present value is the method
that is most frequently used in business today that has been used by investors
to make investment decisions. Many decision-makers have termed it as most
correct and accurate than payback and discounted payback period. Net present
value is the technique used to assess physical asset investment projects which
take into account the projects which could be lucrative for the businesses. The
technique is especially used for the projects that are large in value, quantity
and money. As far as the discounted cash flow approach is concerned, it is an
element of net present value. The only difference between net present value and
discounted cash flow model is that, the net present value deducts the initial
investment after getting the present value of cash flows. (Hillier, Ross, Westerfield, Jaffe, & Jordan, 2010).

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Net present value is also
useful from an investor point of view and can help a lot while deciding on whether
to invest in a company or not (Linn, 2018).
According to him, when an investor is planning for investing in a company, they
always try to invest in such a stock which will give them the highest return
and there is no shortcut to that. Net present value can be used to evaluate
whether it will be a good investment or not. For example, a stock worth $1000
today and inflation is 2 % per year, meaning after one year you can only buy
stuff valuing $980. Expected profit is 3%, so the net present value today is
$1030 divided by one plus inflation rate, you will get $1009.8 that means a
positive net present value. If you get a positive or zero net present value,
that means you are good to go and can invest but when it comes to investing in
stocks, you need to go a bit further. The next step is to look for shares
available in that particular company and then you divide the net present value
with available shares to get net present value per share. Consider a company
with the net present value of $20,000 has 2,000 shares. That means you have a
net present value of $10 per share. The next step is to look for the market
price of that particular share, if that is $4, you can invest but if it’s $14,
the share is already overpriced. On the other hand, this method also has some
limitations i.e. you always don’t know the growing percentage of the company
and deciding on discount factor is critical because if a company decides to
invest in a new project or introducing a new product line and all these
investment decisions has risk aspect also (Linn, 2018).

In today’s competitive
world, the key to success is always growing. From a company’s point of view, it
also includes investment in different projects, and to decide whether to invest
or not a large number of companies use net present value approach (Hillier, Ross, Westerfield, Jaffe, & Jordan,
2010).
Net present value employs discounted cash flow technique in the analysis which
makes the net present value method most widely used as it takes into account
both risk and cash flows. The method assesses estimated cash flows that would
be extracted from the project by discounting them to the current time period
making use of time span of the project and firm’s weighted average cost of capital.
The result is evaluated on the basis of being positive or negative. In case of
the positive figure, the project would be financially feasible and company
should carry on with the project and if the result is negative, the project
should be out rightly rejected without weighing any other factor (Hillier, Ross, Westerfield, Jaffe, & Jordan,
2010).

(Cheng, Kite, & Radtke, 1994) narrated that before
applying the net present value method it’s important to figure out whether the
project is mutually exclusive or independent project. Independent projects are
those not having any link with the cash flow of other projects. However,
mutually exclusive projects are entirely different. The mutually exclusive
projects mean that there are two ways of accomplishing the same result but only
one could be opted as choosing one would make it impossible to choose the
other. When investor evaluates two different projects based on the NPV
criterion, it’s crucial to find out the type of project in order to make accept
or reject decision. In case of independent projects, the project with any value
greater than zero should be chosen. While in case of a mutually exclusive
project, if NPV of one project is greater than NPV of the other project, the
project with the highest NPV should be accepted. If both projects are yielding
negative NPV, both projects should be rejected (Cheng, Kite, & Radtke, 1994).

In simple words, Net
present value technique calculates the present value of the cash flows on the
basis of the opportunity cost of the capital and calculates the figure which
will be added to the wealth of the shareholders if the project is accepted (Cheng, Kite, & Radtke, 1994).