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What are the Problems associated with the Net Present Value ("NPV") technique? Why do people use...

What are the Problems associated with the Net Present Value ("NPV") technique? Why do people use this, then?

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Expert Solution

Problems which are associated with net present value are as follows-

A. Net present value are often calculated in amount and they are not calculated in percentages,so they are not providing adequate measure of comparison.

B. Net present value will also have a problem associated with being applied with those projects which have unequal lives in relation to mutually exclusive contracts.

C. Net present value will also not be the most appropriate valuation measure and equivalent annual annuity is a better measure.

People are using this because this is a very easy method to calculate and this will be often providing with an idea about time value analysis of various projects and this can even be applied with the mutually exclusive projects also so it is having a very high level of popularity when it comes to selection of the project because it is leading to direct comparison between various projects when it comes to comparing them with amount.

jeff jeffy answered 2 years ago
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