NPV would be the true measure of investment profitability. It can be clear that the acceptance rule using the NPV method is to accept the investment project if the net present value is positive and to reject it if the NPV is negative.The market value of the firm’s shares can increase if the projects with the positive NPV are accepted. This would imply that the positive net present value could be displayed by those projects, which generated cash flows at a rate higher than the minimum amount required by investors.
In selecting between mutually exclusive projects; the one with higher NPV should be selected. Adopting the net present value method projects would be ranked in the order of net present value, that is, the first rank would be given to the projects with the highest positive net present value.
NPV recognizes the time value of money, because it employs all cash flows occurring over the entire life of the project. Discounting methodology fosters measuring of cash flows in terms of their present value.
A Memo to the Investment Manager
Given the analysis above, it is be evident that NPV can give the accurate and appropriate measure of the project capabilities. Since there could not be a satisfactory way of attributing true rate of return over a long term asset given in the method of internal rate of return, the method would sometime give misleading measures of the investment worth. The method may give inconsistent and misleading results. In addition, given that the PBP would not be an appropriate method of measuring the profitability of an investment project. Therefore, given the analysis above, it would be evident that NPV would give the accurate and appropriate measure of the project capabilities.
The company should use the NPV method to evaluate its project and in this case would chose to finance Project one since it could provide the highest positive NPV. This could perform better since the net present values would be more realistic as they put into consideration the time value of money as well as all the cash inflows that the project would bring to the firm. Contrary to the payback period method, the NPV values could be used directly to evaluate the projects.
In conclusion, it would be necessary for the school/company to invest in the fleet transport project because it is more economically viable than the alternative project. The fleet transport project has a shorter payback period (PBP) of 1.91 years than the alternative project whose PBP stands at 3 years. Moreover, the fleet transport project has a higher ARR of 38.67% than the alternative one, which is 30%. The projects NPV stands at AED 648,521.82, a figure that is higher than the alternative project of AED 140,000. Therefore, the fleet transport project should be adopted, while the alternative one be ignored.