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Although net present value (NPV) rocks, it is hard to believe that any financial metric representing the future outcome of an investment correctly describes what will REALLY happen. After all, cash flows that are inputs into the NPV analysis are forecasts and forecasts are never accurate. In lieu of a good crystal ball, you can [...] Net present value (NPV) is the most versatile investment metric. It’s based on forecasted cash flows and the opportunity cost of capital. You should accept any investment projects with NPV greater than zero. NPV is an absolute measure, it recognizes the time value of money, and is less prone to interpretation mistakes than its alternatives. [...] This is the second basic principle of finance. Future cash flows are not certain. However, some are more certain than others. You can be more certain of future values of government securities, for example, than of the future values of the stock market. Different investments have also different levels of uncertainty or risk. The concept of [...] “A dollar today is worth more than a dollar tomorrow.” You may have heard this phrase few times before and there is a reason for that: time value of money needs to be considered in every financial analysis that covers more than one time period. This is also the first basic principle of finance. So, [...] |
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