Question

Provide and describe 8 limitations of using NPV as an evaluation tool.

Answer 1

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Below are the limitation of NPV-

1) NPV require the estimation of future cash flow which is difficult and cant be accurately predicated .

2) NPV method fails to make decision of compare the two or more opportunities if project require different cash outflow

3) NPV method fails if the duration of the two project is different.

4) NPV assume that cash flow are reinvested at required rate of return which may not be correct in reality

5) Required rate of return is difficult to compute and there are various method of computing the same therefore assumption may provide us the different outcome if required rate is not correctly taken.

6) NPV evaluation tool is only based on number and therefore it ignore the qualitative aspect while evaluating the project

7) Very complex project require the excel modelling and therefore computation of NPV because too much complex to understand.

8)NPV does not include the opportunity cost of not having capital to capitalize the future investment opportunity .