Net Present Value is the workhorse of capital budgeting. It distills a project’s future cash flows into a single figure expressed in today’s dollars. For all its usefulness, NPV is not a perfect decision tool. Leaders who rely on it without understanding its constraints risk misallocating capital or overlooking strategic opportunities. NPV should inform decisions, not dictate them.
From the Real World
“We looked at 13 alternatives for the new reservoir,” stated the consultant. “And this one came out the best.”
My best you mean the one with the best Net Present Value,” I retorted. “And it’s really Net Present Cost, with a 50-year analysis period, and an 8 percent discount rate. Does any of that bother you?”
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