What is the first step in calculating NRV on a grid with present value?

The correct approach to calculating the Net Realizable Value (NRV) on a grid with present value begins with the understanding of how present value and cash flows interrelate. When you assume the initial investment represents 110%, you are essentially recognizing that the total expected return should encompass not only the return of the initial capital but also an additional margin to account for potential risks or opportunity costs associated with the investment. This leads to a more prudent evaluation of the investment compared to straightforward cash flow calculations.

In essence, by considering the initial investment at a percentage above 100%, you factor in a buffer that guards against uncertainties, making your assessment more robust. This approach aligns with the principle of being conservative in financial projections, which is critical for accurate investment evaluations in management accounting.

The concept revolves around an understanding that future cash flows need to be evaluated against an investment that reflects both its return of capital and the profitability expected from that capital. Therefore, setting the initial investment at 110% allows for a more comprehensive analysis of the economic viability of an investment option when calculating NRV.