Making Investment Decisions Using the NPV Approach

Making Investment Decisions Using the NPV Approach

Abstract

The last few decades have resulted in major transformation across our physical, economical, social and cultural systems. These changes are due to the emerging potential in computer technologies and increasing awareness of the people living throughout the world. Additionally; the strong, effective and highly swift sources of communications across the world have also added to the diversity being observed at international levels. These transformations have influenced almost every discipline, consequently leading to various financial diversities. Presently, the people across the world appear to be highly aware of the developments and variations occurring at any level. These diversities have produced an environment where the involvement and understanding of finance appears to be highly critical. Along with numerous facilities and benefits provided with these advancements and developments, some limitations and risks have also increased specifically with respect to the financial matters. The organizations working at both the domestic and international levels have to deal with high level of diversity and have to cater with variety of issues depending on factors like cultural artefacts, the political environment of the region, overall economic conditions and other regional and international matters. The management of the organizations working at any level has to extend extra efforts in order to cater the probable risks and variations in the pre-defined circumstances. The scenario appears to be slightly complex in comparison with the previous few decades. Presently, the organizations require consideration of extra factors while making investment decisions. Now, they have to deal with high level of diversities at both the national and international levels.

Table of Contents

Abstract2

Chapter 1: Introduction5

1.1Title of the Research5

1.2Background of the Research6

1.3Objectives of the Research6

1.4Research Questions7

1.5 Overview of the dissertation structure8

1.6Summary8

Chapter 2: Literature Review9

2.1Introduction9

2.2Applying the NPV Method10

2.3Assumptions of NPV Model13

2.4Effect of Minimum Rate14

2.5Making Decisions with NPV14

2.6Cash Inflow and Outflow15

2.7Approximation of Cash Flows on an Incremental Basis15

2.8Depreciation16

2.9Inflation16

2.10Review of Decision Rule16

2.11Capital Budgeting for the Programs and the Projects17

2.12Discounted Cash Flow Models (DCF)18

2.12.1The Major Aspects of the Discounted Cash Flow Models (DCF)18

2.12.2 Sensitivity Analysis and Risk Assessment in the DCF Models19

2.13The Scenario Analysis20

2.14The Monte Carlo Simulation21

2.14Net Present Value (NPV) Comparison of the Two Projects21

2.14.1The Total Project Approach22

2.14.3The Differential Approach22

2.15Limitations of the Net Present Value (NPV) Rule23

Chapter 3: Research Methodology24

3.1Introduction24

3.2Research Design25

3.3Primary Research26

3.4Secondary Research26

3.5Data Collection27

3.6Case Study Approach to Research27

3.6.1Advantages and Disadvantages28

3.7Questionnaires29

3.8Interviews30

3.9Sampling Design31

3.9.1Sampling unit31

3.9.2Sample size32

3.9.3Sampling frame32

3.9.4Sampling technique32

3.10Ethical Consideration32

3.11Potential Problems & Remedies33

3.12Validity of the research33

Chapter 4: Findings and Analysis35

4.1Introduction35

4.2 Demographic characteristics35

4.3 Perception of the Respondents36

4.3.1Evaluation of Respondents Perception36

4.4Initial stages of the Analysis37

4.4.1Generation of the Themes and the Categories37

4.5 Interview38

Chapter 5: Summary and Conclusions40

5.1 Summary40

5.2 Conclusion41

5.3Suggestions for Additional Research42

5.4 Limitations of this Research42

References44

APPENDIX 147

Chapter 1: Introduction

The aim of this paper is to evaluate and assess the efficacy of Net Present Value model and to assess its importance in making investment decisions using this rule. A detailed overview regarding the basic concept, the current implications and future aspects of this tool will be presented in the report. In times when globalization and technology take quickest moves, the economies are experiencing risks of ...