Does NPV reflect the real project efficiency?

Vladimir Karpov
PhD in Economics, Associate Professor of Economics, Law and Business Management Department, Odessa National Economic University, Ukraine, e-mail: 0682636461karpov@gmail.com, ORCID ID: http://orcid.org/0000-0002-9968-8380

Cite this article:

Karpov, V. (2019). Does NPV reflect the real project efficiency? Ed.: M. Zvieriakov (ed.-in-ch.) and others [Chy vidbyvaіe NPV realnu efektyvnist proektu?; za red.: М. I. Zvieriakova (gol. red.) ta in.], Socio-economic research bulletin; Vìsnik socìal’no-ekonomìčnih doslìdžen’ (ISSN 2313-4569), Odessa National Economic University, Odessa, No. 1 (69), pp. 108-117.

Abstract

The article considers the theoretical and practical problems of the project efficiency calculating on the example of one of its main estimated indicators - NPV (net present value). The discounted project performance indicators used by most theorists and analysts in some cases do not reflect the real project profitability (unprofitability). The net present value calculation for various options for the nature of projects cash flow is shown in a number of simulated examples. It is shown that for some unprofitable projects the net present value indicator, nevertheless, indicates a positive effect, which contradicts with idea of this indicator using for evaluating of alternative projects efficiency. This situation is typical for projects with long-term loans and quick returns on capital investments. We believe that this situation arises as a result of the fact that costs include in the calculations of performance indicators, which are discounted simultaneously with revenues and thus numerically increase the discounted level of project profitability (when discounting a negative amount of costs, total profitability increases). Although, if we proceed from the theory of money value over time, exactly costs create a future value - PV. The article analyzes the considered contradictions of performance indicators of various project options and proposes a new indicator for projects efficiency evaluating.

Keywords

cash flow; effective project; effectiveness curve; net present value.

JEL classification: O220; DOI: https://doi.org/10.33987/vsed.1(69).2019.108-117

UD classification: 338.12:332.7

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

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