One feature in the assessment of investments in a recession

Abstract

The availability of free funds in the economy is usually associated with the investment process. In the specialized literature, various methods for assessing investments are known, but one of the fundamental methods of assessing investments is related to the calculation of the NPV (Net Present Value) indicator. According to the generally accepted rule, an investment is profitable if there is an NPV greater than zero. A negative NPV indicates that the investment is loss-making and should be rejected. However, this rule is derived under certain conditions. This paper shows a peculiarity in the assessment of investments related to the fact that in conditions of recession there are situations in which an investment with a negative NPV can be accepted. The article uses financial mathematics methods, in particular formulas for accruing interest and discounting future cash flows. Three options are considered in the presence of free cash – to keep it at home, to deposit it on a bank and to invest. Through concrete examples, it has been shown that in conditions of low deposit interest rates and high bank account service fees, it is possible that an investment with a negative NPV would be preferable, which refutes the generally accepted claim in theory.