In regard to the given discussion, I am intended to narrow my attention on to a single focus – the Net Present Value method. In particular, the paper aims to defend the Net Present Value (NPV) method, putting an emphasis on both its strengths and weaknesses. Sure enough , the NPV method gives the chance to “evaluate the projects or investments” (Arshad, 2012, p. 215). It can be said with certainty that the aforementioned concept in finance should not be underestimated within the context of enabling entrepreneurs to determine the anticipated profitability of certain projects and/or investments. Despite the fact that the NPV method deserves a careful study, the formula does incorporate some disadvantages that make it inappropriate for some business decisions.
Of all the disadvantages to the NPV method, it is important to make mention of the one that lies in a dire need for some guesswork in respect of the enterprise’s cost of capital. To be precise, the requirement for guesswork increases the likelihood of suboptimal decision making. More importantly, it may potentially give way to forgoing some promising business ideas. Yes, the weaknesses emerge to be entirely apparent. For all that, the strengths are not less apparent, and they actually outweigh the weaknesses. Among the biggest strengths of this method in finance, it is imperative to take into consideration the fact that the formula sheds the light on the value of a dollar received today. Specifically speaking, the method’s fundamental standpoint is that $1 dollar today is worth more than $1 dollar in the future. Another advantage is that the method focuses on the cost of capital with great emphasis on future business risks. It follows from this that the method can “guarantee the making of relevant decisions” (Juhász, 2011, p. 53).
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In sum, it becomes evident that the NPV method occurs as probably the most optimal approach to compare investments; and although some weaknesses do exist in the use of this calculation, the method’s significance cannot be understated.
References
Arshad, A. (2012). Net Present Value is Better than Internal Rate of Return. Interdisciplinary Journal of Contemporary Research in Business, 4 (8), 211-219.
Juhász, L. (2011). Net Present Value versus Internal Rate of Return. Economics & Sociology, 4 (1), 46-53.
