NPV & Other Appraisal Methods

Question 1

What is NPV?

Answer 1

NPV looks at the difference between a present cash inflows and outflows over the lifetime of a project.
Accept if positive, reject if negative.

Question 2

What are Advantages of NPV?

Answer 2

Accounts for the time value of money
Measures the value added to a firm
Works for all patterns of cash flow

Question 3

What are Disadvantages of NPV?

Answer 3

Requires an accurate discount rate

Question 4

What is IRR?

Answer 4

The discount rate that makes the NPV of a project = 0

Question 5

What are the Advantages of IRR?

Answer 5

Easy to interpret, given as a %
Useful when comparing similar projects

Question 6

What are Disadvantages of IRR?

Answer 6

Projects with unconventional cash flows can have more than one IRR.
Can mislead in mutually exclusive projects
Scale & time ignored

Question 7

What is the Payback Period?

Answer 7

The no. yrs taken before the forecasted cumulative cash flow = the initial outlay of a project.