How a Net Present Value (NPV) Profile is Used to Compare Capital Projects

Long-term Investment Decisions
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Long-term Investment Decisions
Two standard methods are significant when evaluating the value of potential projects, namely the Net Present Value (NPV) and Internal Rate of Return (IRR). The NPV is one of the most refined capital budgeting techniques used to obtain the difference between the project's initial investment and the value of all the cash flows, whereby they are discounted at a rate same to that of the company's cost of capital (Abor, 2017). Notably, firms use the NPV value to accept or reject projects. When the NPV value obtained is greater than $0, the business organization's operations will yield returns more than the cost of capital (Abor, 2017). Therefore, the firm will accept the project. However, with an NPV value less than $0, the company will reject the project because the retur...