A Zero Net Present Value and Forecasting Errors

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A Zero Net Present Value and Forecasting Errors

Table of Contents

Introduction
A Zero NPV
Forecasting Errors
Conclusion
Reference

Introduction

The decision-making process regarding future investments should be based on theoretical frameworks to avoid failure. They include forecasting errors indicating the difference between expected and actual outcomes alongside the net present value (NPV), which should be positive for accepting the projects. Therefore, this paper aims to clarify the formers importance and present the course of action in the case if NPV is close to zero.

A Zero NPV

The first consideration is the meaning of an NPV of zero for the identified objective. The evaluation based on this indicator is accurate, but the uncertainty should be adequately addressed (Milano, 2017). Thus, if NPV is close to zero, it means that a company is unlikely to have profits or losses (Milano, 2017). Hence, when facing such initiatives, the reasonable solution would be to ensure the proper management and reassess the reasons. These steps are essential for confirming their correspondence to organizational goals other than revenue.

Forecasting Errors

Another factor affecting the results of capital expenditure projects is forecasting errors, which are essential at the stage of planning. They mean inaccuracies in determining the initial amount of money for launching an investment opportunity leading to adverse outcomes (Milano, 2017). The importance of analyzing the situation concerning this indicator is conditional upon the fact that its neglect leads to improper distribution of cash flows (Milano, 2017). Consequently, the expected profits might be less significant than planned, or companies might suffer losses instead.

Conclusion

In conclusion, the analysis of prospective projects related to investment should be performed by enterprises with consideration of NPV and forecasting errors. The former reflects the feasibility of initiatives and should be approached with caution when close to zero. In turn, the latter shows the possibility of unexpected results, which is especially important for appropriately projecting cash flows and avoiding failure in the long run.

Reference

Milano, G. V. (2017). When projects have a zero or negative NPV. CFO. Web.

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