Question

Which of the following is NOT an advantage to NPV as a decision rule (assuming the...

Which of the following is NOT an advantage to NPV as a decision rule (assuming the correct discount rate is used)?

A) NPVs scale correctly.

B) NPVs are independent of financing.

C) NPVs achieve the best value per dollar invested for the firm.

D) NPV's are additive.

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Answer #1

NPV scale correctly cannot be used as an advantage. As it does not consider the life of the project. NPV is the diffeediff between present value if cash inflows and present value of cash outflows. It dies not consider the life of project. Suppose two projects having different lives may have similar NPV. And we would end up selecting the one with highest NPV. Hence, life of the project is an important critirea for selection of project which is not been taken into consideration while calculation NPV of the project. It tells us within how many years we will be able to receiver our initial cost.

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