Question
There are benefits to using Net Present Value as a tool for decision making, however there are some drawbacks to using this as a tool
There are benefits to using Net Present Value as a tool for decision making, however there are some drawbacks to using this as a tool to assist in decision making when not paired with other methods of decision making as it could allow projects that are beneficial to the company that are not monetarily profitable. As you mentioned with Project Prioritization, using NPV (Net Present Value) to prioritize the different possible projects or investments based on their net present values, however, what if there is a project that requires to be completed first or started first for other projects to be profitable, or would increase the profitability of those other projects. The first project might be a loss for the company, which would have been rejected and thus the other projects might not be as profitable as they could have been. Or there could be other benefits that do not show up as a Net Present value such as name recognition or increasing market share of the industry. There is project that occurred 6 years ago where SpaceX launched a Tesla car into space to garner attention for the company, this launch was used to highlight the capabilities of the company and to garner attention at the same time as an event that would leave an impression in the public eye. There could be other reasons that a project would be beneficial to a company that would not be evident by using Net Present Value. Such reasons could include environmental improvements, building relations with customers/suppliers, increasing standing in the public eye, adhering to government regulation, seizing a larger portion of the market share, preventing a competitor from entering the market, etc.
Discounted cash flow analysis was used in some fashion with most of the companies I have managed during the industry portion of my career. Be clairvoyant with me for a secondgoing forward in your own management career assume you get the next position, promotion, etc. that you covet. If you accept that new rolehow might NPV assist you to manage that new position
This is not to discount the method, as there are many benefits to using this method, however, to maximize its true beneficial properties there needs to be other analysis that can cover for NPV weakness, what other analysis would you consider using in alongside NPV?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started