MA – May 2021 – L2 – Q4b – Discounted cash flow

Identify and explain two advantages of the Net Present Value technique

Question

b) Identify and explain TWO (2) advantages of the Net Present Value technique. (3 marks)

Answer

Advantages of the Net Present Value Technique:

Uses Cash Flow Rather Than Profit:
The NPV method focuses on cash flows rather than accounting profits, making it an objective measure of the actual cash benefits generated by the investment.
Accounts for the Time Value of Money:
NPV incorporates the time value of money, discounting future cash flows to their present value. This ensures that earlier cash flows are valued more highly, providing a more accurate reflection of the investment’s true profitability.