Net present value (NPV) is used to analyze the profitability of investments by discounting future cash flows to their present value and comparing them to the initial investment amount. A positive NPV means the investment increases firm value and is acceptable, while a negative NPV means it decreases firm value and is unacceptable. To calculate NPV, an analyst estimates future cash flows, the required return, the timing of cash flows, and discounts the cash flows to find their present value minus the initial investment. NPV considers the time value of money and all cash inflows to determine if an investment maximizes firm value and owner welfare. However, NPV is limited by the accuracy of estimating future cash flows and discount rates, does not

1. A PRESENTATION ON NET
PRESENT VALUE , ITS
CHARACTERISTICS AND
LIMITATIONS
Presented by:- Junaid Hassan

2. NET PRESENT VALUE
It is the difference between the present value of
cash inflows and the present value of cash outflows .
NPV is used in capital budgeting to analyze the
profitability of an investment or project.
In other words, the amount invested is compared to
the future cash amounts after they are discounted by a
specified rate of return.
Investments with a positive net present value would be
acceptable. Investments with a negative net present
value would be unacceptable.

3. Steps to be considered :-
 The ist step is to estimate the
expected future cash flows.
 The second step is to estimate
the required return for projects.
 The third step is the timing of the
cash flows and ;
 The fourth step is to find the
present value of the cash flows
and subtract the initial
investment therefore we can get
the Net Present Value.

4. ADVANTAGES OF NET PRESENT VALUE
(NPV)
 It tells us whether the investment will
increase the firm’s value or not.
 It considers all cash inflows.
 It considers time value of money.
 It is consistent with the objective of of maximizing
the welfare of the owners and maximizing the
firm’s value.

5. LIMATATIONS OF NET PRESENT VALUE
 NPV is based on future cash flows and
the discount rate, both of which are hard to
estimate with 100% accuracy.
 It does not give a complete picture of an
investment’s gain or loss.
 Within the NPV method , the limitation is that the
project size is not measured.
 Prone to forecasting errors.