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Among Investment appraisal methods of ARR, IRR, Payback, Discounted Payback and NPV, NPV is the only technique to always give a result that will MAXIMISE SHAREHOLDER’S VALUE.
How does this come about ?In theory, NPV is the best approach because in theory it is dividends that determine the share price and the share price is the measure of shareholders value.
It is cash that determines the amount and the timing of the dividends, and NPV looks at the cash flows and the timing of the flows.
(To say that “NPV is the only technique to always maximise shareholder value” is not strictly true. In real life share prices are affected by many things – not simply dividends.However discussion of this is not relevant until Paper F9)
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