Utilizing the Time value of money
The other criteria used to evaluate investments are market conditions, and strategic benefit vs. short-term benefit. Market conditions are important because it is necessary to know what competitors are doing and if they are looking for similar things to invest in to help improve their bottom line. Strategic and short-term benefit are important because it is necessary to decide if you want a quick return on your investment or a slow and steady return.
The biggest disadvantage to the calculation of NPV is its sensitivity to discount rates. After all, NPV computations are really just a summation of multiple discounted cash flows, both positive and negative, converted into present value terms when the cash flows begin. As such, the discount rate used in the denominators of each present value 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. Finally, another major disadvantage to using NPV as an investment criterion is that it wholly excludes the value of any real options that may exist within the investment. NPV only takes into consideration the present situation not how things may change and impact the future financial picture.
The change in the cost of capital can impact the investment decision process. If the change is positive the investment is a good move for the person or company. If the change is negative obviously the decision to invest would be a mistake and should not occur. If there really isn’t a change other things should be looked at before investing or choosing not to continue the process....