Advantages
1) It recognizes the time value of money in that it compares different amounts coming in at
different periods in time .
2) It takes into account all the entire inflows or returns generated from a given project and as
such it is realistic in gauging the profitability of a project.
3) It can rank projects according to their profitability whereby the highest rank will be given
to that project with the highest NPV which will be the most profitable project.
4) It uses cash flows and not profits which makes it a reasonable assessment of the
investments viability.
Disadvantages of NPV
1) It is more difficult to use than the traditional methods as it will involve tedious
computations in assessing the viability of a venture.
2) it uses the cost of finance to discount the cash inflows, but it ignores the fact that the cost
of finance is not
3) Gives absolute values which cannot be used to compare project of different sizes
NatalieR answered the question on February 9, 2022 at 11:43
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