Question

I read somewhere that sometimes it is better going with projects that have a higher NPV even with high risk. How does time play a role into this equation? Because if you have a high NPV but the project is shorter and more risky, should a business take more account for the time basis as well?

Answer 1

Yes, your consideration is correct because the time duration factors, should also be counted while making decisions through net present value method, because those products which are having a high net present value, but they are also having a high duration then they will be having an additional exposure to the market risk as well, and these market risk cannot be eliminated completely because these market risk will include inflation and interest rates along with the political uncertainty and litigation risk as well.

So, those projects which are having a high net present value in the short run would be preferred before those projects who are having a high net present value in the long run, because they would be exposed to less systematic risk, because of less time duration so these less time duration would be meaning that these project are highly stable and high yielding as well because they have less time to get exposed to the market risk.