Solved: Disadvantages following are the Disadvantages of basing strategic

Disadvantages

following are the Disadvantages of basing strategic decisions on NPV method->

·         The biggest disadvatage of the NPV method is that the discount rates are volatile.the discount rates are not fixed, a small change in the discount rate will affect the output. it takes into account some guesswork also about the company’s cost of capital.

·         It is not favourable in comparing two projects of different sizes for example a $1mn Project will have a high NPv value than a project of $10000.

·         Its accuracy depends upon the quality of the input. the better the inputs the better the output the investor should be having the knowledge of the size of the CFs(cash flows) the exact value of the discount rate as well as the time of CFs, which is impossible.

·         NPV does not takes into account the opportunity cost of not having the capital to invest in the future investment opportunities.

·         while taking strategic decisions relying only on this method of NPV is not sufficient , one considers more factors like IRR.