Under this method, a company should accept an investment venture if N.P.V. is positive i.e. if present value of cash outflows exceeds that of cash inflows or at least is equal to zero. (NPV ≥0). This will rank ventures giving the highest rank to that venture with highest NPV because this will give the highest cash inflow or capital gain to the company.

 Advantages of NPV

  • It recognises time value of money and such appreciates that a shilling now is more valuable than a shilling tomorrow and the two can only be compared if they are at their present value.

  • It takes into account the entire inflows or returns and as such it is a realistic gauge of the profitability of a venture.

  • It is consistent with the value of a share in so far as a positive NPV will have the implication of increasing the value of a share.

 4. It is consistent with the objective of maximising the welfare of an owner because a positive NPV will increase the net worth of owners.

Disadvantages of NPV

  • It is difficult to use.

  • Its calculation uses cost of finance which is a difficult concept because it considers both implicit and explicit whereas NPV ignores implicit costs.

  • It is ideal for assessing the viability of an investment under certainty because it ignores the element of risk.

  • It may not give good assessment of alternative projects if the projects are unequal lives, returns or costs.

  • It ignores the PBP.