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Good morning,
I’m trying to answer a question from BA1.
The question is which project a company should pick, given that the directors wish to maximise shareholder wealth.
I am given NPV (at a fixed discount rate) and ROCE.
According to the answer, I’m meant to look exclusively at the NPV, so choosing the project with the highest NPV.I’m not sure why this is.
Thank you!
Welcome to the Opentuition forums. NPV will give an answer in terms of absolute return which will be preferred if wanting to maximise shareholder wealth in the absence of other restraints. A company will prefer return of $100000 on investment of a million dollars over a return of $20000 on investment of $100000. This is despite the $20000 return being higher in percentage terms than the hundred thousand dollar return. NPV also takes into consideration the time value of money- the fact that money in present is more valuable than money in the future. Hope this helps. Please ask of you need more help or elaboration of the above points.
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