Net Present Value (NPV) reflects the amount of cash an investor or funder expects to receive from a project after inflows are recouped through all sorts of costs. This figure can be understood as the investor’s total profit generated once the payback begins. NPV gives a clear indication of whether a project is worth investing in based on likely costs and potential risk. NVP has many more advantages over other investment criteria.
The rules that apply to NVP include common sense and the reasonableness of the investment and take into account return criteria. Since the calculation of NVP involves a time horizon, it is already profitable over static measures. Accordingly, the first advantage of NVP is its connection to the idea of an expected value, which will be less than at the time of investment. Unlike the payback period, NVP recognizes that the value of a currency is temporary and subject to change, so it lays this metric into the calculation of discount rates. Assumptions about the cost of capital allow the NVP to be calculated and suggest a strategy for profitable ways to implement the project. Consequently, the second advantage of this criterion is flexibility and additivity, that is, understanding the benefits of all available projects or one specific one. A third advantage may be that the calculation of NVP considers the size of the investment. This means that NVP is a unidimensional criterion that allows us to estimate the degree of probability of wealth creation based on the number of cash flows.
Thus, NVP has several advantages over other investment criteria based on its application. First, NVP considers the present value of money, which gives a clear picture of cash transactions. Second, it is flexible and additive, meaning it evaluates the cost of capital and the appropriateness of the investment. Third, NVP is a one-dimensional indicator that considers all, even space investments.