Question

Question 1:-

a) list down the advantages and disadvantages of NPV method. (4 each)

b)Briefly write three factors that NPV technique takes into consideration in its analysis.

Answer 1

• Advantages of NPV:

1. Time value of money:

A dollar today worth more than a dollar tomorrow owing to its earning capacity. NPV considers the discounting net cash flow if an investment to determine its viability, hence considering time value for money.

2.Decision making:

NPV not only help to evaluate the projects of same size, but it also helps in identifying whether a particular investment is profit or loss making.

• Disadvantages of NPV:

1. ​​​​​​​No set guidelines to calculate required rate of rwturn, asNPV rests on discounting its cash flow to present value using required rate of return, which sometimes result in inaccurate NPV.
2. Can't be used to compare projects of different sizes:

NPV is an absolute figure, not a percentage. Therefore, NPV of larger project scan be more than smaller projects. The return of small project can be higher than its investment, but overall NPV might be lower.

3. Hidden costs:

It does not consider any hidden or sunk or other preliminary costs about specific projects, therefore, profitability may not be higher

• Major factors that affects NPV are:
• Timing of the expenditure(receipt)
• Discount rate(the higher the discount rate, the lower the PV of an expenditure at
• Specified time in the future.