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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Discounted cash flows – Net Present Value
Sir, why do we calculate the Net Present Value of the cash inflows? Wouldn’t it make more sense to do it on the money we invested(the money we are paying for the project) because that is the money we would either need to borrow, and pay interest on, or money we could’ve invested and earned interest on?
The present value of the cash flows is the amount that would be needed to invest to earn those flows at the companies required rate of return.
If the actual amount required is lower (and so the NPV is positive) then the return must be higher than required and the project is worthwhile. If the actual amount required is higher (and so the NPV is negative) than the return must be lower than that required and the project is not worthwhile.
I suggest that you watch my free Paper MA lectures on investment appraisal where the logic is explained (and the logic from Paper MA is assumed knowledge for Paper FM).