Question

NPV always gives you correct decision for accepting the project. If NPV always gives us the correct decision why should we pay attention to profitability ratios or IRR? Provide an example where one of these other ratios might change your decision on a project.

Answer 1

Net present value is generally used for capital budgeting related decision making but it has various kinds of disadvantaged attached to it like-.

1. It does not accounts for any opportunity cost so in business there are lot of opportunity cost.it must be recognised in order to undertake a project.

2. The value of $1 today is higher than the same amount of value of the dollar tomorrow so this can be false at times when there is a better investment made for dollars which will help in order to make the value of the dollar in futures better than what it is at present.

so we can use various kinds of profitability ratios or internal rate of return if we want to account for opportunity cost and other cost which are associated with the overall project, and if we are also not able to allocate and assign an adequate rate of return for discounting we can also use other profitability ratios. We can also use other profitability ratios If the cash flows which are expected out of a project are not accurately estimated.