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Is there a case where NPV might not be the best methodology to evaluate new investments?...

Is there a case where NPV might not be the best methodology to evaluate new investments? If so, how could the problem be overcome?

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Answer #1

1. The net present value method is not suitable when there is capital rationing that is many projects are available but the capital available is not adequate to invest in all the projects in that case, We have to follow profitability index. So that we apply the cpaital to the most profitable project first.

2. The Net present value is not the best method when the discount rate that is the cost of capital of the firm is not known exactly or it varies. Then the net present value will result in superficial results.

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