Week 4 Forum 2

Week 4 Forum 2
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Week 4 Forum 2
The NPV refers to the general measure of the profitability index of the organizational project that is calculated after the subtraction of any available cash outflow (Copeland, et al, 1983). The NPV approach considers the time worth of money as well as the general effect of the value of the financial cash flows. Similarly, through the use of the time value of funds concept, every business organizations focuses on the possible ways of increasing the profitability levels of their shareholders increasing the level of the market share and decreasing expenses. This is measured through the use of the profitability index to determine appropriates projects that are viable for investment.
The NPV principle depicts that any organizational undertaking should be accepted if the net present worth is positive as well as declined in the case of a negative NPV. This falls in line with the main aim of wealth creation for the firm shareholders because only projects that increase the wealth are acceptable. On the other hand, managers of different organizations stand to be indifferent to all investments that have zero net present worth. However, this is quite right because such projects neither creates nor builds the shareholders’ wealth levels.
Additionally, the primary goal of financial management in the company is to provide the criteria for capital distribution in the organization. For example, if there is no in the company and excess cash is not required, then the company should distribute the amount available to shareholders.

Correspondingly, the NPV requires funds to be distributed to the respective shareholders if they are likely to receive the same amount in the future. This through the use of the time value of money concept, an amount of cash received today is more valuable than future cash due to general changes in the cost of commodities.
Reference
Copeland, T. E., Weston, J. F., & Shastri, K. (1983). Financial theory and corporate policy (Vol. 3). Massachusetts: Addison-Wesley.