Net Present Value Method – Discounting Foreign Cash Flows

NPV tells you: "How much wealth will this project create for shareholders in today's money?".

1. The Logic

₹100 next year is worth only ₹90 today (at 10% interest). We must "Discount" all future cash flows to today's value and compare with Investment.

• Formula: NPV = PV of Inflows - Initial Investment.
• Rule: Accept if NPV > 0.

2. Estimating Discount Rate (k) for MNCs

For foreign projects, the discount rate (k) is adjusted: k = Risk Free Rate + Beta(Risk Premium) + Country Risk Premium

• Country Risk: If Vietnam is risky, add 2-3% to the discount rate. Higher rate = Lower NPV.

3. Diagram: The Decision Process

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4. Exam Notes: Writing the Answer

Question: "Why is NPV considered the best method?" (5 Marks)

Answering Strategy:

1. TVM: It considers Time Value of Money.
2. Wealth: It measures absolute increase in shareholder wealth.
3. Risk: It allows adjusting for risk by changing the discount rate.

Summary

• King of Methods: In any conflict (e.g., NPV says Yes, IRR says No), always follow NPV.
• Positive NPV: Means the project earns more than the cost of capital.

Quiz Time! 🎯

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