... value of money, which helps to negate the effects of inflation. Although inflation is not directly a cash flow, it has an effect on tax and this is then added onto the cash flows themselves. The NPV rule also includes the cost of capital (or the discount rate); helping to take risk into account and covering any uncertain cash flows that may arise. It only includes the relevant costs, and it only takes these costs when they occur. The aim of any firm is to maximise its market value, and a positive NPV increases the value of the firm, helping to maximise shareholder wealth. The NPV rule has three key advantages in that it uses cash flows instead of earnings, it uses all the cash flows of a project, and it discounts the cash flows with regards to the time value of money. Other forms of investment appraisal tend to ignore at ...

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