Limitations of NPV and IRR

When considering an investment, a positive NPV indicates that the investment is expected to produce a PV of all of the benefits, which outweighs the PV of all of the costs, given the cost of capital or the hurdle rate. However, difficulties may arise when comparing several investment options, each with a positive NPV. Also, because access to capital always has limitations, a consumer must often choose between several sound investment opportunities. While NPV does consider all parts of the investment over its economic life, including the time value of money, it depends on selection of an appropriate discount rate (the impact of which can be significant, as shown in the above example), which involves subjective judgment.

When considering two options with the same useful project lives and the same initial investment requirement, the one with the greater NPV would be the logical choice,

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