Changing Discount Rates and NPV

In the above analysis, assume that you had been asked to use one discount rate for all of the cash flows. Is there a discount rate that would yield the same NPV as the one above?

If yes, how would you interpret this discount rate?

Biases, Limitations, and Caveats

In spite of its advantages and its linkage to the objective of value maximization, the net present value rule continues to have its detractors, who point out several limitations

• The net present value is stated in absolute rather than relative terms and does not, therefore, factor in the scale of the projects. Thus, project A may have a net present value of $200, while project B has a net present value of $100, but project A may require an initial investment that is ten or 100 times larger than project B. Proponents of the NPV rule argue that it is surplus value, over and above the hurdle rate, no matter what the investment.

• The net present value rule does not control for the life of the project. Consequently, when comparing mutually exclusive projects with different lifetimes, the NPV rule is biased towards accepting longer term projects.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

Get My Free Ebook


Post a comment