Paper 3 · Investment Appraisal
Which of the following is a genuine limitation of the net present value (NPV) method of investment appraisal?
AIt ignores the time value of money, treating cash flows received in different years as equally valuable.
BIt is based on accounting profit rather than cash flows, so it does not reflect the timing of cash receipts.
CIt requires an appropriate discount rate to be estimated, and the result is sensitive to the rate chosen.
DIt ignores cash flows arising after an initial number of years, so long-term returns are not taken into account.
Explanation: NPV already accounts for the time value of money and uses cash flows rather than profit, so those are not its weaknesses. Its real limitation is that it depends on estimating a discount rate, and the result changes if that rate is wrong.
Derived from ZIMSEC Accounting Paper 3, June 2019, Q4
