Revisiting Net Present Value: Usage, Challenges, and Implications for Corporate Finance

Summary Discounted cash flow methods for evaluating investment opportunities enjoy wide use in the petroleum industry. The two most popular measures are net present value and internal rate of return. While these two measures are generally suitable as accept/reject criteria, they are not so useful in capital rationing situations, where a ranking of projects is required. Decades ago authorities suggested that the net present value divided by the initial outlay is a better measure for ranking projects. This kind of measure becomes more difficult to apply correctly when ail the capital costs in a project are not incurred up front, but are spread over a number of years. It is common practice to discount these future capital outlays back to the present and include them in investment (the divisor in the index). Simple examples demonstrate, however, that some obviously erroneous rankings can result from this procedure. By using an alternative definition of project investment, based only on the project net cash flows and the discount rate, we can avoid these pitfalls and obtain a better profitability measure for ranking projects.

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; tab-stops: 1.0in;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-fareast-font-family: Batang;" lang="EN-ZA">Capital budgeting is one of the most important areas of financial management. There are several techniques commonly used to evaluate capital budgeting projects</span><span style="font-size: 10pt;" lang="EN-ZA"> </span><span style="font-size: 10pt; mso-fareast-font-family: Batang;" lang="EN-ZA">namely the payback period, accounting rate of return, present value and internal rate of return and profitability index</span><span style="font-size: 10pt;" lang="EN-ZA">.</span><span style="font-size: 10pt; mso-fareast-font-family: Batang;" lang="EN-ZA"> Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV), which is the model academics consider superior.</span><span style="font-size: 10pt;" lang="EN-ZA"> In particular this research focused on small, medium and large businesses and investigated a number of variables and associations relating to capital budgeting practices in businesses in the Western Cape province of South Africa. The results revealed that payback period, followed by net present value, appears to be the most used method across the different sizes and sectors of business. It was also found that 64% of businesses surveyed used only one technique, while 32% of the respondents used between two to three different types of techniques to evaluate capital budgeting decisions. The findings show that the more complicated methods such as IRR and NPV are most favored by the large businesses as compared to the small businesses. The majority of the respondents believed that project definition was the most important stage in the capital budgeting process. Implementation stage appeared to be the most difficult stage for the manufacturing sector whereas Project definition, Analysis and selection and Implementation were generally rated as being the difficult stages by the retail sector. Project definition and Analysis and selection </span><span style="font-size: 10pt; mso-ansi-language: EN-GB;" lang="EN-GB">were found to be the most difficult stages by the service sector.</span><span style="font-size: 10pt;" lang="EN-ZA"> Most businesses used the cost of bank loan as a basis in capital budgeting and</span><span style="font-size: 10pt; mso-ansi-language: EN-GB;" lang="EN-GB"> more than two thirds of respondents used non-quantitative techniques to consider risk when making a decision on investing in fixed assets. </span></span><span style="font-size: 10pt;" lang="EN-ZA"></span></p>

Capital budgeting is a crucial financial planning process that helps organizations evaluate long-term investment projects to maximize profitability, with this study focusing on Nepal’s beverages industry by analyzing two companies—Sunrise Nepal Food & Beverages Pvt. Ltd. (SNFBPL) and Birgunj Pure Drinking Water Udyog (BPDWU). The primary objective was to assess capital budgeting techniques such as Net Cash Outlay (NCO), Net Present Value (NPV), and Internal Rate of Return (IRR), alongside reviewing financing sources, cost of capital, and tool effectiveness. Using comparative analysis and chi-square hypothesis testing, the study found that SNFBPL had a higher NCO and longer Payback Period (10.03 years) but a superior NPV (NPR 55.6 million) and Profitability Index (1.225), whereas BPDWU exhibited a better IRR (15.16%) and quicker payback (6.63 years), with SNFBPL’s lower cost of capital (11.26%) attributed to leverage. The findings highlight significant differences in NCO and NPV but not IRR, leading to recommendations such as optimizing cost of capital, boosting sales, and prioritizing NPV in decision-making. This study adds value by examining capital budgeting practices in Nepal’s emerging market, offering insights for financial planning in the beverages sector.

Pipe-in-Pipe technology is a pipeline system consisting of two coaxial pipes. The inner pipe carries the fluid and is encased within a larger diameter outer pipe which seals the annulus between the two pipes. The annulus can be filled with a wide range of thermal insulating materials such as fiberglass, glasswool, microporous materials, aerogel, polyurethane foam, ceramics etc. This is seen as a solution to the effective management of the long problem of flow assurance in subsea fields. The pipe-in-pipe technology is thought to be extensively ideal for the transportation of well bore fluids from a subsea field, as it is capable of withstanding the difficult conditions of the ocean with its low overall heat transfer coefficient (OHTC) of less than 1 W/m2K, but this it does achieve at added cost. The aim of this paper is to economically analyze the pipe-in-pipe technology using a case study of Rosa field, an offshore field off the coast of Angola relative to offshore Gas Development in Nigeria. The following profitability indices; Net present value (NPV), internal rate of return (IRR), Profitability index and Payout or payback period were used to compare the cost of a pipe-in-pipe technology and that of a conventional pipeline system for an oil and gas field. For the pipe-in-pipe technology, a real NPV of $5.5 billion, IRR of 65.7%, PI of 3.22and payback period of 1.46 years and a money of the day NPV of $10 billion, IRR of 82.1%, PI of 5.0 and payback period of 1.19 years were achieved while for a conventional pipeline, a real NPV of $5.6 billion, IRR of 66.5%, PI of 3.28 and payback period of 1.49 years and money of the day NPV of $10.1 billion, IRR of 83%, PI of 5.1 and payback period of 1.16 years were achieved.

Biomass gasification based power plants can play an important role in power sector in Malaysia with her abundant agricultural and forest resources. In this research energy and economic feasibility, and environmental impact of biomass gasification power plant has been analyzed and assessed for sustainable power generation in Malaysia, the plant being a clean development mechanism supported project. Gasification based power generation with a dual fuel internal combustion engine is found more biomass combustion power plant. But, the annual fuel cost is significantly higher with gasification plant claiming MYR 10 million/y for a generation of 67,500 MWh. The net present value, internal rate of return, and PBP for a 10-MW gasification based dual fuel internal combustion engine power plant without loan financing using empty fruit bunch pellet as biomass; with CER issued at USD16/tCO 2 ; and without loan financing provides net present value, internal rate of return, and PBP of MYR 19.68 million, 11.90%, and 6.05 y, respectively. With a loan financing at 3% per year with CER still be effective the net present value, internal rate of return, and PBP is estimated to be MYR 7.03 million, 3.97%, and 11.78 y, respectively. However, if a 60:40 debt equity is applied then the project net present value, internal rate of return, and payback period seen to improve slightly. The net present value attains a positive value of MYR 3.6 million. Internal rate of return and PBP values are found to be 7.08% and 8.27 y, respectively. The emission reduction achieved with the plant is 17,863 t CO 2 /y, 206 t SO 2 /y, 90 t NOx/y, and 10.37 t CO/y, respectively. Energy efficiency and tariff policy have been found to have highest impact on economic profitability of gasification based power generation units.

Sempol Ayam Crispy Maw.Ih outlet is a business engaged in the culinary field that will be opened in the city of Bandung using a take away service system. In this study, the market aspect was examined by distributing questionnaires to 100 respondents who were residents of the city of Bandung with an age range of 15-64 years. The results of the distribution of this questionnaire show that the percentage of the number of potential markets is 94%, the available market is 90%, and for the target market, Sempol Ayam Crispy Maw.Ih sets a target of 0.4% of the available market. For the technical and financial aspects, secondary data is used. obtained from several sources. The results of the projected feasibility calculation for five years show that the MARR percentage is 13%, the Net Present Value (NPV) is Rp.123.256.159, the Internal Rate of Return (IRR) is 59%, and the Pay Back Period (PBP) is 1 year. 9 months. Due to the NPV > 0, the IRR > MARR, and the PBP is not greater than the financial projection period, the opening of the Sempol Ayam Crispy Maw.Ih outlet is feasible. Sempol Ayam Crispy Maw.Ih outlet is a business engaged in the culinary field that will be opened in the city of Bandung using a take away service system. In this study, the market aspect was examined by distributing questionnaires to 100 respondents who were residents of the city of Bandung with an age range of 15-64 years. The results of the distribution of this questionnaire show that the percentage of the number of potential markets is 94%, the available market is 90%, and for the target market, Sempol Ayam Crispy Maw.Ih sets a target of 0.4% of the available market. For the technical and financial aspects, secondary data is used. obtained from several sources. The results of the projected feasibility calculation for five years show that the MARR percentage is 13%, the Net Present Value (NPV) is Rp.123.256.159, the Internal Rate of Return (IRR) is 59%, and the Pay Back Period (PBP) is 1 year. 9 months. Due to the NPV > 0, the IRR > MARR, and the PBP is not greater than the financial projection period, the opening of the Sempol Ayam Crispy Maw.Ih outlet is feasible.

The economic feasibility of commercial bioactive compound process from fermented soybeans

Aquaculture in Floating Net Cage (FNC) is one of the reliable aquaculture technologies that is used to optimize the utilization of waters on rivers, lakes and reservoirs. The types of fish that is usually preserved in Floating Net Cage are Gold Fish ( Cyprinus carpio ) and Nile Tilapia ( Oreochromis niloticus ). Survey method is applied in this research and data sample is drawn from the farmer population of floating net cages in Kecamatan Pinoh Utara. The objective of this study is to determine the financial feasibility of aquaculture with Floating Net Cage (FNC) system. This achieved by considering Net Present Value (NPV), IRR (Internal Rate of Return), Net Benefit-Cost Ratio (B/C Ratio), Analysis of PP (Payback Periods) and Sensitivity Analysis. The result indicates that aquaculture of Nile Tilapia and Gold-Fish with Floating Net Cage (FNC) system was financially significant shown by Net Presents Value (NPV) 227.246.769,84 rupiahs, Internal Rate of Return (IRR) 190,97%, Net Benefit Cost ratio (B/C Ratio) 4,34 and Payback Periods (PP) 0,53 years (6 months 10 days). The sensitivity analysis indicates that if there was an increase in operational costs, the amount should not be more than 304,19% and if there was a decrease in profits, the amount should not be more than 44,11%. Keywords: Financial Analysis, Aquaculture, Floating Net Cage, Net Present Value (NPV), Internal Rate of Return (IRR), Net Benefit-Cost Ratio (B/C Ratio).

Abstract. The utilization of former mining areas for tourism purposes serves as a solution for land reclamation and post-mining economic value enhancement. PT XYZ in Batubalak Village, South Lampung Regency, has a former andesite mining area with potential to be developed into a tourist destination. This study aims to analyze the financial feasibility of converting the mining land into a tourist attraction by examining Benefit Cost Ratio. The research method employed project feasibility analysis, including calculations of Break Event Point (BEP), Cashflow, Payback Period (PBP), Net Present Value (NPV), and Internal Rate of Return (IRR). Data were collected through field studies, stakeholder interviews, and cost-revenue analysis. Key assumptions such as discount rates, visitor estimates, and operational costs were tested for sensitivity to ensure result reliability. The results indicate that the project is feasible under a realistic interest rate (6.75%), supported by a positive NPV, acceptable IRR, and reasonable payback period. However, high risk arises if the investor's required return rate is overly aggressive (18.75%), which could jeopardize financial feasibility. Thus, the project's success heavily depends on cash flow stability and market conditions. The study recommends risk management strategies and effective marketing to minimize uncertainties. Abstrak. Pemanfaatan lahan bekas tambang untuk objek wisata merupakan salah satu solusi dalam upaya reklamasi dan peningkatan nilai ekonomi lahan pasca-penambangan. PT XYZ di Desa Batubalak, Kabupaten Lampung Selatan, memiliki areal bekas tambang andesit yang berpotensi dikembangkan sebagai destinasi wisata. Penelitian ini bertujuan menganalisis kelayakan finansial proyek konversi lahan tambang menjadi objek wisata dengan memperhatikan aspek break-even point, payback period, dan pengembalian investasi. Metode penelitian yang digunakan adalah analisis kelayakan proyek meliputi perhitungan Break Even Point (BEP), Cashflow, Payback Period (PBP), Net Present Value (NPV), dan Internal Rate of Return (IRR). Data dikumpulkan melalui studi lapangan, wawancara dengan pemangku kepentingan, serta analisis biaya dan pendapatan proyek. Asumsi dasar seperti tingkat diskonto, estimasi pengunjung, dan biaya operasional diuji secara sensitivitas untuk memastikan keandalan hasil. Hasil penelitian menunjukkan bahwa proyek ini layak dijalankan dengan tingkat suku bunga realistis (6,75%), ditunjukkan oleh NPV positif, IRR melebihi biaya modal, dan payback period yang masuk akal. Namun, risiko tinggi muncul jika tingkat pengembalian yang diminta investor terlalu agresif (18,75%), yang dapat mengganggu kelayakan finansial. Dengan demikian, keberhasilan proyek sangat bergantung pada stabilitas asumsi arus kas dan kondisi pasar. Rekomendasi dari studi ini adalah perlunya manajemen risiko dan strategi pemasaran yang efektif untuk meminimalkan ketidakpastian.

Among the enigmas of corporate finance theory that have received little attention is the puzzling use of the payback method as a capital budgeting tool. Although the payback method has many drawbacks, it is widely used in industry (see Klammer 1972; Fremgren 1973; Schall, Sundem, and Geijsback 1978).1 Gordon (1955) attempted to explain this anomaly by observing that the inverse of the payback period is an approximation for the internal rate of return. But as Sarnat and Levy (1969) point out, the accuracy of the approximation depends on the life of the project and its IRR. For low values of IRR the inverse of payback is a very poor approximation. Moreover, it is difficult to believe that corporations that use complex and sophisticated technologies need a rule of thumb to approximate something as simple to compute as the IRR. In fact, empirical evidence shows that most firms compute both the IRR and the payback period (see Schall The payback criterion continues to be widely used in industry, although there is little support for it among the academicians. This paper attempts to find an economic rationale for it by using an incentive model with asymmetric information. It argues that when the managers possess private information regarding projects selected for implementation, it is in their interest to choose, ceteris paribus, projects that pay back faster. Since manager's wages depend on output (because their productivity is unknown), by choosing projects that pay back fast they hope to improve their reputations. * I wish to thank Milton Harris and an anonymous referee for their helpful suggestions, while I retain the responsibility for any remaining errors. 1. It has been found that payback is rarely used as a primary capital budgeting method. It is used as a secondary criterion to a discounted cash-flow method such as NPV (net present value) or IRR (internal rate of return).

Sound financial management and decision-making on capital investments are critical to company survival and long-term success. With this truth affirmed by the global financial crisis, this study sets out to examine the capital budgeting tools at National Investment Bank Limited (NIB) in Ghana, adapted for management decision making. It establishes the various capital budgeting techniques used by NIB in undertaking investment projects and how these decisions affects the firm’s value, profit and growth rate. As methodology, the study adopts both primary and secondary sources which are further analyzed with the use of correlation analysis. The findings reveal that there is a positive relationship between the variables and their effects are significant. The study concludes that, the firm used capital budgeting techniques such as Net Present Value, Internal Rate of Return, Profitability Index, Discounted Payback Period, Payback Period and Accounting Rate of Return in order to maximize the firm’s value which is usually affected by the profit and the growth rate. Given the conclusion herein, the study recommends among others that NIB should educate and train their staff on the various capital budgeting tools and the formation of knowledgeable team that will evaluate projects using the capital budgeting tools due to its irreversibility nature, huge investment outlay and its long term effect. Keywords: Capital budgeting, Techniques, Cash Flow, Investments, Decision making, Ghana DOI: 10.7176/RJFA/11-4-04 Publication date: February 29 th 2020

Summary. The article proposes a financial model for a motor vehicle service enterprise and provides examples of its application. Research object: the operational process of a motor vehicle service enterprise. Purpose of the article: to develop an adapted financial model for motor vehicle service enterprises, enabling the assessment of startup prospects, strategic planning, and business development. The authors propose a comprehensive approach that considers revenues, expenses, cash flows, and investment attractiveness. Research methods: mathematical modeling of processes. The proposed financial model enables the evaluation of the feasibility of investment projects for establishing a motor vehicle service enterprise or improving specific aspects of its operations. Using the model, economic efficiency indicators that do not consider the time factor can be assessed, including: profit margin, payback period of initial investments, project profitability, as well as indicators for projects requiring a significant time frame. In such cases, time-sensitive indicators are used, such as net present value (NPV), discounted payback period, and internal rate of return (IRR). Calculations of some of these indicators are provided earlier in the article. Key aspects of the financial model: 1) forecasting revenues and expenses: estimation of the annual production program, labor intensity, revenues, and expenses to justify economic feasibility; 2) efficiency analysis: the methodology includes calculating indicators such as net profit, profitability, break-even point, and project payback period; 3) risk assessment: applying sensitivity analysis to identify key factors affecting profitability. Results: 1) the model allows for analyzing projects with varying levels of risk and incorporates the time factor; 2) the model facilitates the determination of economic efficiency using indicators such as net present value (NPV), internal rate of return (IRR), as well as indicators that do not account for discount rates. Practical significance: the research results are of practical value for auto service enterprises. Forecasting based on the model helps substantiate investments, optimize costs, and ensure business stability. Research prospects: further studies aim to enhance the model, develop methods for risk assessment, and improve forecasting depending on changes in economic conditions. Key conclusions: 1) the financial model is an effective tool for managerial decision-making; 2) the integration of economic efficiency evaluation methods reduces investment risks and optimizes the activities of auto service enterprises. Keywords: motor vehicle service enterprise, financial model, revenue, expenses, profit, efficiency, margin, payback period, net present value, risks, break-even point.

Sustainable buildings generally demonstrate a friendly environment, save energy and reduce operational costs, thus opening up significant investment opportunities in green buildings of the office property type. It is a shame that currently there are still very few office building developers who apply the green building concept, meanwhile the green building concept provides 31% greater profits than conventional buildings. This study aims to analyze the financial feasibility of four office buildings which are divided into two categories, namely category one (building 1 and Building 3) with a grade A building type and category two (building 2 and building 4) with a grade B building type. Building 1 and building 2 has received green building certification issued by GBCI. Building 2 and building 4 are buildings with a conventional concept. Calculation analysis is carried out using the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP) methods. Based on the results of the analysis, from the two categories of building types, the results showed that the NPV of each building was said to be financially feasible with an NPV ratio of 294% (category 1) and 162% (category 2). The IRR obtained exceeds the MARR value, with a comparison of 54% (category 1) and 21% (category 2). The payback period is less than the project investment period, namely 20 years, with a difference of 5 years (category 1) and 3 years (category 2). The office buildings with the highest and best NPV are Building 1 and Building 3 (category 1), so that even though the construction costs and green building design planning costs incurred are higher, in the research object of each building there are quite significant differences in NPV and IRR and It is hoped that all new construction and renovation work carried out by developers can apply the green building concept.

This research's title is "Applications of Capital Budgeting Method in Feasibility Study of Rooms and Ballroom Investment at Hotel Panorama Lembang", the purpose of this research are to know the feasibility of hotel investment based on financial projection aspect which using Capital Budgeting Method at Hotel Panorama Lembang. The feasibility of investment evaluate by the tools of capital budgeting model, which is have aspect of Discounted Payback Period, Net Present Value, Internal Rate Of Return, and Profitability Index in Hotel Panorama Lembang. The results of this research from the financial projection evaluated with the tools of capital budgeting evaluation which have the results can be seen that investment is feasible, as calculated by the method of discounted payback period is 8 years and 2 months based on hotel evaluation and 6 years and 11 months based on writer's evaluation, net present value in positive result (NPV > 0) in the amount of Rp. 1.743.693.325 , Internal Rate of Return is higher than the discounted factor of 12% in the amount of 23.9303%, profitability index is in positive result higher than 1. Based upon this calculation summarised that the feasibilty of investment based on financial projection are accepted. Based on the evaluation from the capital budgeting method, the criteria of investment at Hotel Panorama Lembang are accepted. The management used the methods which doesn't improve a good result in feasibility. Methods that used by the author more improve a good result in investing decisions, because using a selection of forecasting methods for future revenues. The author used a time series forecasting methods to improve more revenues for hotel. This forecasting method can provide the closest forecast result and the highest rate of accuracy. The author recommends to the management of Panorama Hotel Lembang to continue and accepted the investment of new rooms and ballroom. Considering the result of a feasebility study with a capital budgeting methods are accepted. The author also recommends to the management of Panorama Hotel Lembang to use a proper forecasting methods, such as time series methods.

Building sustainable societies through vertical soilless farming: A cost-effectiveness analysis on a small-scale non-greenhouse hydroponic system