Investment Model - Present Value Criteria Model

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One of the most important decisions that any business is required to make involves the decision to invest in new plant and equipment. There may be many different investment opportunities open to the firm. How does it decide which investment will be the most profitable? This is particularly problematic as some of the costs and benefits associated with the investment will arise sometime in the future. The Present Value Criteria model tries to help solve this dilemma. This is a financial, single-equation model. It is shown in Equation 1, in the simplest form:

Future values may not be positive (benefit) but be negative (cost). The difference between total benefit and total cost is known as the Net Present Value (NPV) of the investment.

In choosing between different investments the firm will choose the one with the highest NPV.

Most firms have a minimum net present value figure that an investment must exceed to be considered as a potential candidate.

Models can be far more complex than the simple model illustrated in Equation 1.

The Treasury Short-Term Forecasting Model runs into over a hundred simultaneous equations. It is used to forecast economic variables such as unemployment, inflation, growth and balance of payments over the short-term.

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Reference(s)
	Book		Campbell, D. J. & Craig, T. (2005) Organisations and the Business Environment. 2nd Edition. Elsevier: Netherlands, North Holland, Amsterdam. [ISBN: 9780750658294]. [Available on: Amazon: https://amzn.to/3VHJupz].
	Book		Pfaffenberger, B. (2002) Computers in Your Future 2003. 5th Edition. Prentice Hall: United States of America (USA), New Jersey (NJ), Bergen, Upper Saddle River. [ISBN: 9780139227820]. [Available on: Amazon: https://amzn.to/3gv8n7D].

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Reference (or cite) Article
	Kahlon, R. S. (2013) Investment Model: Present Value Criteria Model [Online]. dkode: United Kingdom, England, London. [Published on: 2013-01-29]. [Article ID: RSK666-0000095]. [Available on: dkode | Ravi - https://ravi.dkode.co/2013/01/investment-model-present-value-criteria.html].

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