Question

1. Discuss what are the weakness and the strenth of NPV?

Answer 1

The weakness of NPV are:
It requires estimating cost of capital which can be difficult to asses and may lead to wrong rejection and acceptance.
It is not useful for copmaring projects which have different sizes of investment as NPV is determined by size of inputs. Also if projects have differing time, they can be hard to adjudge.

The strength are:
It takes into account time value of money as opposed to payback or other non discounted method.
It tells whether the project shall create value or not judging whether NPV is positive or negative.
NPV method takes into consideration the cost of capital and the risk inherent in making projections about the future. Higher the risk more shall be the discounting rate required.