What is the major pitfall of the NPV decision rule?

The biggest problem with using the NPV is that it requires guessing about future cash flows and estimating a company’s cost of capital. The NPV method is not applicable when comparing projects that have differing investment amounts.

What factors affect net present value?

Factors Affecting Net Present Value. The major factors affecting present value are the timing of the expenditure (receipt) and the discount (interest) rate. The higher the discount rate, the lower the present value of an expenditure at a specified time in the future.

Does inflation affect NPV?

Under the real method of NPV calculation, cash flows for all periods are measured in time 0 dollars and discounted using the real discount rate i.e. a discount rate which doesn’t contain the effect of any expected inflation.

Which of the following is not the merit or advantage of net present value?

These pros and cons will also help in the right selection of capital budgeting methods like IRR, Payback Period, NPV, etc. NPV lets you know whether the value of all cash flows that a project generates will exceed the cost of starting that particular project.

What are some advantages of net present value?

Advantages include:

• NPV provides an unambiguous measure.
• NPV accounts for investment size.
• NPV is straightforward to calculate (especially with a spreadsheet).
• NPV uses cash flows rather than net earnings (which includes non-cash items such as depreciation).

What are the pitfalls of using IRR instead of NPV in choosing of projects?

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.

What is risk adjusted net present value?

In finance, rNPV (“risk-adjusted net present value”) or eNPV (“expected NPV”) is a method to value risky future cash flows. rNPV is the standard valuation method in the drug development industry, where sufficient data exists to estimate success rates for all R&D phases.