Npv Profile Case Study

“The NPV Profile: A creative way at looking at the NPV” by Frank Lefley and Malcolm Morgan explores the battle between using NPV (net present value) and IRR (internal rate return). NPV is the correct method of investment appraisal, but IRR is still the preferred method. Although this method is preferred, the article simply states that no single investment technique will give all the answers to investment situations. There are some weaknesses to NVP which include; failing to take into account the size of the capital expenditure required to produce the increased value and not identifying the most advantageous combination of projects when there is a capital shortage. The NPV can be seen in a different light, which includes NPVP (net present value profile). NPVP is comprised of DPB (the discount payback), DPBI (the discounted payback index), and the MGR (the marginal growth rate). Financial models should always include …show more content…
This concept builds on NPV by involving discounted payback method, discounted payback index, and marginal growth rate. The factors that are captured in this model are the long-term benefit to shareholders, time spent on the project, and the associated risk. When investing in a project its is important to know when the organization will realize its gain/profit and how long it will take to do so. Knowing these variables will give clues to weather the investment is the right decision to make. The longer the project the greater the risk. The NPVP will consider these constraints during the analysis. It is safe to say that using just the NPV poses a great threat to businesses from an investment standpoint. It is vital to use NPVP because it is a more flexible valuation to use across the board and will draw closer to a true appraisal of investment