What are the limitations of Net Present Value (NPV)?
An example of an AI chatbot conversation about the limitations of NPV in investment analysis.
What are the limitations of Net Present Value (NPV)?
NPV has several limitations, including its reliance on accurate cash flow projections and discount rates.
Can you explain why cash flow projections are so important?
Sure! Cash flow projections are crucial because NPV calculations depend on estimating future cash inflows and outflows.
What happens if the cash flow estimates are incorrect?
If the estimates are incorrect, the NPV can be misleading, potentially leading to poor investment decisions.
Are there any alternatives to NPV?
Yes, alternatives include Internal Rate of Return (IRR), Payback Period, and Profitability Index, each with its own pros and cons.
How do I choose the best method for my investment analysis?
Choosing the best method depends on your specific investment goals, risk tolerance, and the nature of the cash flows.
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