Q23RQ - Horngren'S Financial And Managerial Accounting

Question

What is the decision rule for NPV?

Step-by-Step Solution

Answer

Net present value (NPV) can be calculated by taking the sum of the discounted cash flows and subtracting it from the initial investment. The discounted cash flows are determined using the discounting factor and the current value. The investment project should permit it if the NPV is positive; however, if it is negative, the investment project should not permit it.

Step 1: Definition

Net present value comes after subtracting the total current value of all future cash flows from initial investment. It is employed for investment decision-making and capital budgeting purposes.

Step 2: Advantages of NPV

The advantage of the net present value method is that this method considers the fact of the time value of money. A further period of capital expenditure is constantly added to the cash flows to reduce them.