Beyond NPV

Fox, RP; Roddy, EM; Swientozielskyj, S

Abstract

Net Present Value is a deceptively simple prescription that has dominated academic advice. Discount all expected cash flows at a risk adjusted discount rate and if the result is positive, invest, otherwise do not invest. It is still possible to read the following in textbooks: “NPV considers all of the costs and benefits of each investment opportunity” and “we have seen that NPV is a totally logical way of assessing investment opportunities” and even that it is the academically preferred method. Nowadays, few academics and, we suspect, no practitioners support this view.

In this article we present a schema that summarizes the more recent theoretical developments. Their effect is to change the whole approach to investment analysis from just trying to predict expected cash flows to a far more business like analysis of the investment problem. Such is the extent of the change when going beyond NPV that it is something of a puzzle that many accounts still maintain that NPV is a complete answer.

Citation

Fox, R., Roddy, E., & Swientozielskyj, S. (2014). Beyond NPV

• Report Type: Discussion Paper
• Publication Date: Jun 8, 2014
• Deposit Date: Jun 11, 2014
• Publicly Available Date: Jun 11, 2014