ABSTRACT
This chapter contains net present value; the principles on which it is based; underlying assumptions; guidance on application, and relevant issues; and related models. Net Present Value (NPV) is a yardstick for appraising capital expenditure projects based on discounted cash flow methods. A capital expenditure project that is calculated to give a positive NPV return is an attractive project. NPV is equal to the estimated increase in the value of the firm's future cash flows stated at present cash values. NPV determines whether the return on capital expenditure is more or less than that achieved by investing that sum at current investment interest rates. When calculating NPV, all estimated future cash flows must first be reduced to current values. Initial capital expenditure is assumed to occur at year zero. The model assists with capital expenditure appraisal and aids in the consideration of risk and return. NPV assists informed lease/buy decision-making and decision-making with regard to additional capacity.
