What Are The Disadvantages Of NPV As An Investment Criterion?

Question

What Are The Disadvantages Of NPV As An Investment Criterion?

3 Answers

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Answer 1

Some of the disadvantages are:

The major disadvantage is that NPV calculation is based on discount rates and the future discount rates have to be estimated which means that if there are unexpected changes n the discount rate, the NPV value will become very different form what was initially expected.

The cash flows in the future are also estimated and they may not remain the same after some time thereby changing the entire NPV.

Answer 2

Advantages and Disadvantages of the NPV Method:
Advantages
􀂾 Consistent with shareholder wealth maximization: Added net present values
generated by investments are represented in higher stock prices.
􀂾 Consider both magnitude and timing of cash flows
􀂾 Indicates whether a proposed project will yield the investor's required rate of
return
Disadvantage
􀂾 Many people find it difficult to work with a dollar return rather than a
percentage return

Answer 3

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