I thinks that there must be better way than NPV on making capital investment decisions but what it could be?
Good Answers (1)
Michael A. D
Risk Advisor and Quantitative Investment Professional
Best Answers in: Foreign Investment (1)
NPV is a simple measure of "value" in today's dollars. It does not provide any insight to the risk you are taking and consequently relative value between investment decisions.
By way of an example, an investor may consider investing in two assets, a loan to a strong credit with virtually no risk of default and another to a weak credit with twice the likelihood of default of the first.
The NPV will tell you how much more you are being compensated by investing in the riskier asset but on its own its does not tell you whether that is a prudent decision.
Alternatives used in the market have been "Sharpe Ratios," "Upside/Downside Ratios", and values of loss measured across a range of scenarios.
More Answers (4)
the hospitality industry is a high capital intensive business. it is also modular in its nature. the overall business is a sum of many units. profitability increases with increased number of units because of advantages of scale and reach.
since it is cap ex intensive, the requirement of cash is high initially. also the risk involved is high because cap ex once spent cannot be reinvested.
NPV is a good measure to understand future cash flow to justify initial low profitability (or loss).
Krishnaswami C
Ex banker, Financial advisor, education delivery and management
Best Answers in: Education and Schools (1)
NPV is the simple concept comparing what you have and what you get. For the sake of equality of comparison, you are reducing the anticipated cash flow to the present level and compare with your investment. This is only the financial model for decision making. Simple and effective.
But there can be other motives for capital invesments which is beyond NPV. For example, branding is the object, there NPV alone can not be deciding factor. All these discussions are based on commercial model where you expect your investments to grow in value.
Rakesh S
Dir-Center of Mngt Consultancy/Teaching /Mngt Dev , Director- Centre for International Liaison at Confidential
Best Answers in: Using LinkedIn (1)
IRR (Internal Rate of Return) is better. maybe still better is IRR incorporating in it the inflation rate so that we get the real value of funds adjusted for the time value.
Chris C
Managing Partner at Brave Partners LLP
Best Answers in: Auditing (1), Venture Capital and Private Equity (1), Economics (1), Financial Regulation (1), Risk Management (1), Commodity Markets (1)
Many investors will simply look at (cash out) / (cash in)
