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What is/are the disadvantage(s) of net present value (NPV) in the process of decision for selecting the best project?

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Question added by Almutaz Bakry Sidahmed , Internal Audit Manager , Banan real estate
Date Posted: 2015/03/10
Muhammad Ramzan Tufail  ACCA
by Muhammad Ramzan Tufail ACCA , Assistant Finance Manager , Eltizam Asset Management Group

The biggest disadvantage to the calculation of NPV is its sensitivity to discount rate. After all, NPV computations are really just a summation of multiple Discounted Cash flows - both positive and negative - converted into present value terms for the same point in time (usually when the cash flows begin). As such, the discount rate used in the denominators of each Present Value (PV) computation is critical in determining what the final NPV number will turn out to be. A small increase or decrease in the discount rate will have a considerable effect on the final output.

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