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Net present (NPV)
used in order to work out the present value of the return on an investment
How much return on an investment is worth in today’s term
Uses discount factors which can be based on either inflation or interest rates
Higher NPV = better
NPV formula
Sum of present values - original cost
advantages of NPV
More accurate method that takes a long-term view into account
Disadvantages of NPV
Ignores timing of cash inflows and prone to forecasting errors when considering seasonal factors
Calculations are based on a projects useful lifespan which might be a pure guess
