What are the primary strengths and weaknesses of the Net Present Value

What are the primary strengths and weaknesses of the Net Present Value method of capital budgeting?

What will be an ideal response?

ANSWER

The major strength of the net present value method is that it takes into account the time value of money through the discount rate. It implicitly makes the reasonable assumption that any interim cash flows from the project are reinvested at the firm’s cost of capital. One weakness of the net present value method is that it provides an answer in dollar terms while many managers focus on percentage returns when assessing projects. The greatest challenges with the net present value approach are determining realistic cash flow estimates and estimating an appropriate hurdle rate.