What Is the Limitation of Using the Net Present Value

question 12

Multiple Choice

What is the limitation of using the net present value for evaluating capital investment alternatives?

• A) Ignores the time value of money
• B) Does not consider cash flows
• C) Cannot be used to compare projects of different size
• D) All of the above are limitations of the net present value method.

---

Definitions:

Legal Form

The specific legal structure of an entity or agreement, which determines its legal responsibilities, rights, and the regulatory framework it operates within.

Net Present Value

A calculation used to assess the profitability of an investment by summing the present values of its expected cash flows minus the initial investment cost.

Financial Instruments

Agreements resulting in one party acquiring a financial asset while the opposite party incurs a financial liability or issues an equity instrument.

Derivative

A contract that changes value in response to an underlying variable, requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, and is settled at a future date.