Explain the theoretical justification of the NPV approach for investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches . One of the key areas of the long-term NPV approach. The long-term decision-making that businesses must grapple with is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to make these decisions, businesses must evaluate the magnitude of cash outflows and inflows, the lifespan of the investment, the degree of associated risk and the cost of obtaining funds. The main steps of the capital budgeting cycle can be summarized as follows: • Forecast investment needs. • Identify the project(s) to meet the needs. • Evaluate alternatives. • Select the best alternatives. • Carry out expenses. In the capital budgeting cycle, it involves determining whether the benefits of investing large sums of money exceed the costs of making those investments. The range of methods used by business organizations can be classified into two ways: traditional methods and discounted cash flow techniques. Net present value (NPV) is a discounted cash flow (DCF) technique that draws on the concept of opportunity cost to assign a value to cash inflows resulting from a capital investment, where the cost of Opportunity is the “calculation of what is sacrificed or given up as a result of a particular decision”. If you receive money, you are likely to save it and put it in the bank. So what a business sacrifices by having to wait for cash inflows is the lost interest on the amount that would have been saved. Middle of paper......upfront costs per cash Cash flow per year provides the return on investment in terms of cash flow. This is the time required to recover the initial project costs and capital expenditures. The greater the return on investment (i.e. the longer the payback period), the riskier the project. However, the cash flow method of repayment does not take into account the time value of money, nor does it credit subsequent revenue for repaying initial costs. In other words, it does not provide any information on the rate of return on investment achieved during the project. None of the above financial measures are adequate for project prioritization. Most companies use at least two of these financial metrics to prioritize projects. Since economic evaluations are done using spreadsheets, there is no reason not to calculate all of these financial metrics and then use the appropriate ones when prioritizing the project..