The net present value is an evaluation technique that measures the difference between the present value of inflow and outflow. The outflow is the initial cost of the project (Correia, 2012, p. 17). This method is used to calculate the expected returns from investment. Investors make their decisions by looking at the expected cash inflow from investment and the actual outflow then translating those figures to the present value. They are three methods that can be used by the manager to make investment decisions including internal rate of return, net present value, and payback period.
The net present value is the most preferred model by many analysts because it takes into account the time value of money. Moreover, it offers managers the best investment project that will generate adequate future returns. When making investment decisions, managers compare the initial outlay with the present value of future cash flow. Stretcher (2015) argued that positive net present values show that a project will make profits. However, a negative net present value demonstrates that a project will generate loss hence it should be rejected. Armstrong (2015) noted that a high net present value is preferred because it indicates that a project will generate high returns. However, although many managers prefer this method, it is based on several assumptions, which gives room for errors. Managers can be able to minimize the errors by double-checking the estimates to ensure they are accurate.
The net present value can be used to assess the viability of pursuing a master’s degree. For instance, the net present value of pursuing a master’s degree can be compared with the expected future cash flow. In the case study, we can be able to establish the present value of future cash flow for a student who has a degree today and after achieving a master’s degree in accounting. The cost of a master’s degree is the initial outlay of the “project” which will be compared with the present value of future cash flow. The net present value of a degree holder can be calculated by determining the present value of the cash flow. Since we are not given the initial outlay, the present value of a degree holder is the value of future cash flow after ten years.
The net present value of the master in accounting can be established by calculating the present value of additional cash flow (66,000-50,000= 16000). Since the cash flow is an annuity, the present value can be calculated from year 1 to year 9.
From the calculations above, it is evident that pursuing a master’s degree has a high net present value, which is an indication of high income. Therefore, it is advisable for students to pursue a master’s degree in accounting since it will help them to earn high salaries compared to the initial outlay of $12,000.
References
Armstrong, V. S. (2015). Using real option analysis to improve capital budgeting decisions when project cash flows are subject to capacity constraints. Academy Of Accounting & Financial Studies Journal, 19(2), 19-26.
Correia, C. (2012). Capital budgeting practices in South Africa: A review. South African Journal Of Business Management, 43(2), 11-29.
Stretcher, R. (2015). Net present value simulation: a case study. Journal Of Business Strategies, 32(2), 139-150.