What are the advantages of the net present value technique?

The main advantage of the NPV method is that it takes into consideration the time value of money, by discounting future cash flows at an appropriate discount rate that is based on the company’s cost of capital and the project’s risk.

Is negative NPV good or bad?

A positive NPV means the investment is worthwhile, an NPV of 0 means the inflows equal the outflows, and a negative NPV means the investment is not good for the investor.

What are the major disadvantages of the use of the internal rate of return method of analyzing capital investment proposals?

Disadvantage: Ignores Size of Project A disadvantage of using the IRR method is that it does not account for the project size when comparing projects. Cash flows are simply compared to the amount of capital outlay generating those cash flows.

Which of the following is a disadvantage of the payback method?

Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Two projects could have the same payback period, but one project generates more cash flow in the early years, whereas the other project has higher cash flows in the later years.

What is one disadvantage of NPV as a capital budget method quizlet?

The main disadvantage of the NPV method is the need for​ detailed, long−term forecasts of free cash flows generated by prospective projects. The profitability index is the ratio of the present value of the future free cash flows to the initial investment.

What are the disadvantages of using the payback period to evaluate an investment?

Disadvantages of Payback Period

• Only Focuses on Payback Period.
• Short-Term Focused Budgets.
• It Doesn’t Look at the Time Value of Investments.
• Time Value of Money Is Ignored.
• Payback Period Is Not Realistic as the Only Measurement.
• Doesn’t Look at Overall Profit.
• Only Short-Term Cash Flow Is Considered.