From the course: Investment Evaluation

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Pros and cons of NPV

Pros and cons of NPV - Microsoft Excel Tutorial

From the course: Investment Evaluation

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Pros and cons of NPV

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- There are definite pros and cons to using net present value to evaluate your investment. Regardless, I would say it's one of the most widely used techniques to figure out if you're gonna get the most bang for your buck. Of course, this course just gives you an intro. There's a lot more nuance that goes into it than what I've shown you. So what are the pros? Well, just like this kind of cash flows, NPV accounts for the time value of money. As you can recall, a dollar is worth much more now than that same dollar will be in the future, mostly due to inflation and risk. So what are the cons? Well, the big one, which we'll be able to address with another technique, is that NPV doesn't give us visibility into how long it'll take to generate a positive NPV. So our NPV rule tells us to accept all investments where the NPV's greater than zero. However, it doesn't tell us when that positive NPV will be achieved. Will it happen in five years? Will it happen in 15 years? Another limitation of…

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