Project viability assessment through Net Present Value (NPV)
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Revision as of 19:03, 12 February 2023
Contents |
Abstract
The net present value (NPV) is a widely used financial metric in project management used to determine whether a given project is worth commencing (source). For a given project to be considered a profitable investment, a minimum requirement is that NPV > 0. (source) NPV is calculated by aggregating the streams of costs and benefits over a specific time period associated with a project into a single value, making it easy to compare projects with one another. The central aspect of the NPV calculation involves assigning varying weights, dependent on time, to the benefits and costs through the utilization of the discount factor, where a discount rate is applied. The discount rate refers to the rate of interest that is used to discount all future costs and benefits. By doing so, the NPV accounts for and subscribes to the paradigm of the time value of money, referring to the idea that money has a different value at different points in time.
