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Net Present Value (NPV): It’s Accuracy

Net present Value
Posted In: Finance
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With net present value being dependent on the projected cash flows of a time to come makes NPV results vary in accuracy. All aspects of a business structure are involved in pre-population and analysis of the net present value. The aspects used in a business structure to calculate NPV are current revenues, current operational expenses, depreciation value of currency, taxes and other payable liabilities and the total cost of capital. The net present value is a good indicator of business performance, thus very useful and its accuracy something top closely look at.

While trying to calculate net present value and measure its accuracy in a brand new retail startup, we will take into consideration the number of businesses running on retail base structure around the same model. This makes it easier to come up with a comparison of accuracy needed to gather information to tabulate the net present value. However, a good cash flow analysis and NPV would not be achieved by comparison means. This is because, even though comparable information can be sourced from other retailers the actual and factual information regarding a new start up cannot be easily predicted to a high standard of accuracy. For a start-up, waiting for a business to take traction makes it easier to record projections that can achieve a better accuracy resulting in a more accurate NPV.

Your beliefs become your thoughts, Your thoughts become your words, Your words become your actions, Your actions become your habits, Your habits become your values, Your values become your destiny. ― Gandhi

For example: The net present value of a Pharmaceutical company that is introducing a new drug can be hard to calculate and analyze. This is because, new drugs are among items that have very volatile market acceptance. With regulatory problems and licensing, marketing cost and uncertainty in on demand, makes it impossible to derive a cash flow analysis based on the net present values.

In another Example: For a company with a successful product in one country and wants to try the product in another country, the NPV, demand and cash flows can be estimated rather accurately. With all the information needed for this calculation being available from the performance where the product was already in the market and doing well, projections can be done therefore achieving an accurate NPV.



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