User:YatingChen/sandbox

As an indicator of projects’ investment, NPV has several advantages and disadvantages for decision-making. Consideration of the time value of money allows the NPV to include all relevant time and cash flows for the project. This idea is consistent with the goal of wealth maximization by creating the highest wealth for shareholders. Beyond that, cash flow timing patterns and size differences for each project provide an easy comparison of different investment options. However, the NPV method also comes with many disadvantages. First of all, the consideration of hidden costs and project size is not a part of the NPV approach. Thus, investment decisions on projects with substantial hidden costs may not be accurate. In the second place, NPV can only be accurate if the input numbers are perfectly correct given the fact that NPV requires the firm to knowledge the accurate discount rate, timing, and size of cash flow. The accuracy of NPV relies heavily on the rationality of the choice of the discount factor, representing the investment's true risk premium. Therefore, the optimal configuration established by NPV creates a lot of diversifications. Outcomes of NPV presented maximum profitability of projects, along with the lowest Levelized cost of investment cost, whereas ranking of NPV investment projects displays the lack of consideration in the project’s size the cost of capital. Moreover, issues related to inherent conceptual assumptions are also one of the disadvantages. In particularity, the assumption of certainty and one target variable. In addition, the difficulties of comparing mutually exclusive projects with different investment horizons are exhibited. Since unequal projects are all assumed to have duplicate investment horizons, the NPV approach can be used to compare the optimal duration NPV. Synthesizing the relevant advantages and disadvantages, the NPV approach provides optimal results when the combination of investment projects and constrained budgets are provided based on a capital rationing situation. More importantly, the selected projects must have a recurring investment horizon.