NPV will not be of significant use if the project is of shor

NPV will not be of significant use if the project is of short duration ? Is is always true? why not? examples

Solution

NOT ALWAYS TRUE. NPV is the net present value of all cash inflows & outflows occurring at different time periods during the entire project.It takes into account all cash flows without any exception ,which are then discounted at the cost of the finance specifically-acquired to fund the project or the cost of its capital,in general. So, NPV provides a valuable guideline ,in longer-duration projects ,where time value of cash flows are material. On the other hand,in shorter-duration projects ,where time-value attached to cash flows may not be that wide , NPV may be of little use , is true to a larger extent --as the time involved from beginning to end ,does not allow much variation(discount factor employed) from the actual value But thus cannot be generalised , as for example, 1.when the discount rate used ,ie. Cost of capital, is high , which will heavily reduce the cash inflow as well as outflow , occuring towards the end of the project. 2. when there is sudden inflationary trends in the overall economy, falling within this short duration. 3. Any other factor outside the control of the investor.