21/10/2018 ACCA AiD: NPV(Net Present Value) Advantages and Disadvantages

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Saturday, June 2, 2012

NPV(Net Present Value) Advantages and Disadvantages Search This Blog

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NPV
Advantages
1. A project with a positive NPV increases the wealth of the company’s, thus
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maximise the shareholders wealth.
2. Takes into account the time value of money and therefore the opportunity
cost of capital. ▼ 2012 (1)
3. Discount rate can be adjusted to take account of different level of risk
▼ June (1)
inherent in different projects.
4. Unlike the payback period, the NPV takes into account events throughout the NPV(Net Present Value) Advantages and
life of the project. Disadvantage...
5. Superior to the internal rate of return because it does not suffer the problem
of multiple rates of return.
6. Better than accounting rate of return because it focuses on cash flows rather
than profit.
7. NPV technique can be combined with sensitivity analysis to quantify the risk Pages
of the project’s result.
8. It can be used to determine the optimum policy for asset replacement. Home

Do you think that question paper of December

Disadvantages semester is easier than June semester?

NPV
Disadvantages
1. NPV assumes that firms pursue an objective of maximising the wealth of their
shareholders.
2. Determination of the correct discount rate can be difficult.
3. Non-financial managers may have difficulty understanding the concept.
4. The speed of repayment of the original investment is not highlighted.
5. The cash flow figures are estimates and may turn out to be incorrect.
6. NPV assumes cash flows occur at the beginning or end of the year, and is not
a technique that is easily used when complicated, mid-period cash flows are
present.

LSBF

Posted by Alokito at 11:03 AM

1 comment:

Anonymous September 6, 2016 at 11:45 AM

For disadvantage number 1, is it not true that the objective financial managers is "the
maximisation of the wealth of their shareholders"?

I am getting confused.

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