Net present value - part 2

In this lesson

1. 0:00 Introduction to Changing Discount Rates
2. 0:47 XYZ Project Example Setup
3. 1:08 Calculating Discount Factors Step by Step
4. 2:51 Year Three Discount Factor Calculation
5. 3:35 NPV Merits and Strengths
6. 5:08 NPV Drawbacks and Limitations

About this lesson

You'll work through the methodology of compounding discount rates—for example, discounting year two cash flows at both year one and year two rates, then year three cash flows through all three applicable rates—ensuring your NPV calculation reflects the actual cost of capital for each period. The video also explores why NPV remains the superior investment appraisal method despite its limitations. Its key strengths include recognising the time value of money, providing an absolute measure in pounds and pence that helps with mutually exclusive investment decisions, and considering the entire project life. However, you'll learn that NPV relies heavily on accurately determining the cost of capital—which can be challenging in practice—and requires cash flow estimates across the full project timeline. The lesson also addresses a practical limitation: NPV typically assumes annual cash flows occurring at year-end, which doesn't reflect real-world operations where revenue and costs occur throughout the year. This content is essential for Performance Management, Advanced Performance Management, and Strategic Business Leader papers where investment appraisal and capital budgeting decisions are tested.

Duration: 7m