Recently I am learning techno-economic analysis and I read this article ( Frontiers of Environmental Science & Engineering 2023, 17 (4), 47. https://doi.org/10/gr6dmv.) It described the concept of NPV as "the sum of the cash of the project to be invested by discounting the net cash flow of each year during the lifespan of the project up until such a point in time where the project starts producing at the industry benchmark rate of return or the set discount rate". It seems that if the NPV of a project is positive, then it is economically feasible. However, the authors concluded that the composting facility (HDC) was not economically feasible based on a NPV of $62606.
I'm not sure whether I understand the concept of NPV right now.
NPV is term which describes or measures the ability of project profitability based on the current or market discount rate. It also serves as financial factor for estimation of market value of an asset or project.
However depending on type of project and industry it has several implications on the project returns because even though the project can produce a positive NPV over its life time ,the discount rates assumed at the time of evaluating NPV may not remain same due to changing macroeconomics factors.
For this reason , many financial analysts and modelers include an offset or cushion factor while evaluating NPV. But despite those tweaks , if the project NPV just break evens the total invested capital, then such project outcomes remain skeptical in long run due to economic factors such as countries WPI inflation etc and uncertain factors that might arise from project scope creep during its life. This kind of situation usually adds to hidden financial risks and increases the overall project risk also. Such type of projects are prioritized as LOW in organization project portfolio.
So a positive NPV definitely indicates a positive feasibility, but not a 100% CERTAIN feasibility.
Thanks. Vasishta Bhargava Nukala .
Your response helps me understand the concept more fully.
I think the best use of the Net Present Value metric is to compare two projects, or to rank-order multiple competing projects when capital resources are limited. Projects with higher NPV should receive priority, but other metrics should also be employed. And if there is only one project to consider, then it should also be evaluated with several metrics, including NPV. All such metrics are only as good as the analysis that goes into estimating input cash flows. NPV is not a simple payback calculation - it is a complex method that is very dependent on accurate estimates of cash flow. Another consideration is that any metric applied to lengthy, economy-level programs over long periods of time may not be appropriate. Large-scale projects such as those at a national level can have very complex cash flows that are sensitive to outside economic, military or political pressures.
- Badges
- Science topic
- Similar topics
- Geoscience
- Atmospheric Sciences
- Climate Science
- Climate Change