Why Return On CAPITAL INVESTMENTS Should Be Disclosed By NPV ?
Though it is rear but it is fair indeed to publish project NPV along with discounted payback period and cost of capital to better understand the contribution of investments to the shareholder wealth creation:
The objective governing the financial management decisions in a for-profit company is to maximize the wealth of its owners, the equity shareholders. Shareholder wealth is measured by the market value of their shares. The value or price of a share will depend on the money returns that shareholders expect to receive in the future from the share (i.e. dividends), and the yield or return that investors require. Future dividends will depend on the returns that a company makes from its own investments. A company, when making new investments, should therefore consider the effect on future returns for shareholders. Hence, cyclically maximizing shareholder wealth depends on the returns a company makes on its investments.
Here, the key point for study is return. Accounting profits is an expression of return. But these are subject to a number of different possible accounting treatments. Other ways of figuring out returns are internal rate of return (IRR) and net present value (NPV). The information that the IRR provides is more easily understood but it ignores the size of investment and the exposed of absolute wealth creation. The NPV is superior because it focuses on the measurement of shareholder wealth. The NPV provides a measurement of the expected increase in the value of a company; and so the increase in shareholder value by the amount of project NPV. The shareholders will expect the amount of project NPV or additional return to be paid to them as dividends, or reinvested by the company to provide even higher returns and dividends in the future. Either way, the perceived value of their investment will go up.
Unfortunately, usual practice among the listed companies in Bangladesh is to reveal the returns in the form of accounting profits. Though it is rear but it is fair indeed to publish project NPV along with discounted payback period and cost of capital to better understand the contribution of investments, undertaken by the listed companies either to swell revenues or to reduce costs or both, to the shareholder wealth creation.