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Explain the advantages and disadvantages to the net present value technique. Explain under what circumstances the...

Explain the advantages and disadvantages to the net present value technique. Explain under what circumstances the NPV and IRR could provide different decisions. Please provide examples (numerical form) which would support your response.

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Answer #1

The advantages of the NPV technique are as follows :-

1. NPV incorporates time value of money in the analysis

2. NPV is the best technque used to compare projects in different analysis like scenario analysis, due dilligence, capital budgeting etc.

The disadvantage of NPV are as follows :-

1. Extra cost or sunk costs not included in the analysis

2. The required rate used in the time value of money calculation is difficult to ascertain

3. NPV favours bigger cash flow projects

Numericals where NPV and IRR will present different results is as follows :-

I hope this helps

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