Using and Evaluating Net Present Value

The video tutorial explains the net present value (NPV) as an investment appraisal measure, highlighting its advantages in considering the time value of money and profitability over time. It is favored by large businesses for comparing projects. However, NPV has limitations, such as complex calculations and the need for projects to have the same initial outlay for comparison. The tutorial also addresses biases towards quantitative data and the reliability of data used in NPV calculations. Ethical considerations and business objectives are often overlooked in NPV analysis. The video concludes with a summary of these points, emphasizing the importance of understanding NPV's limitations in exam contexts.

Why do large businesses prefer using Net Present Value (NPV) for investment appraisal?

• It is the only method that uses qualitative data.

• It considers the time value of money and profitability over time.

• It simplifies the calculation process.

• It requires less data collection.

What is a major limitation of using Net Present Value (NPV) for comparing projects?

• It focuses solely on qualitative data.

• It is the simplest method available.

• It requires complex calculations.

• It can only be used for projects with different initial outlays.

How does Net Present Value (NPV) potentially show bias in investment appraisal?

• By requiring less data for analysis.

• By being the most straightforward method.

• By emphasizing quantitative data over qualitative data.

• By focusing on qualitative data over quantitative data.

What is a potential issue with relying solely on NPV for investment decisions?

• It always aligns with the company's long-term strategy.

• It is the most ethical appraisal measure.

• It may overlook ethical considerations in projects.

• It guarantees the highest possible return.

Why might data used in NPV calculations be unreliable?

• It is never influenced by internal company politics.

• It is often collected by a large group of people.

• It can be biased if collected by a small group with vested interests.

• It is always collected by unbiased sources.