Application Of The Net Present Value Method

  • Financial Charges

Companies should use the required rate of return to discount a project’s net cash flows.

  • Incremental Cash Flows

In calculating a project’s net cash flows, it is the incremental net cash flows that are important

  • The Importance of Excluding sunk costs

Suppose that the Split Oil Company has spent $20 million exploring a particular area without success

  • The treatment of allocated costs

Companies Often Allocate costs such as rent, water, research, and development, head office costs, travel, and other overhead costs to their divisions

  • Residual value

When a project is terminated, it is likely that a portion of the initial capital outlay will be recovered

  • Timing of the cash flows

In some cases, financial calculations are based on the precise timing of the relevant cash flows

  • Inflation and project evaluation

The Australian economy has at times experienced prolonged periods of inflations

 

Graham, Peirson., et al. 2002., Business Finance : McGraw – Hill Australia

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Peirson, Graham. (2002). Business Finance. 2002. hlm 159

 

One response to this post.

  1. Very nice article, exactly what I needed.

    Reply

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