CD 1 @2 W4 Parent P - Essay Example

DQ1 There are numerous techniques that can be used to determine which project to pursue. A lot of analysts start by performing research on the company and project that is being considered by the firm. For instance if a firm is considering a project in a market segment or industry in which the firm does not have much experience or expertise the risk associated with such a project are higher. Along with a qualitative analysis another tool that is often used in the industry is NPV. NPV is a great quantitative technique that can help decision makers such as managers select the best project alternative based on sound financial reasoning.

One of the attributes of the NPV financial method is that it incorporates time value of money into the formula. The present value tables are used to determine the discounting factor to obtain the present value total. DQ2 When an analyst applies the NPV value method he should only consider projects with positive NPV value. The optimum selection of a project using NPV methodology is the project that has the highest NPV (Besley & Brigham, 2000). Corporations can use NPV to evaluate multiple projects.

The math used in the NPV analysis is a proven formula that has been used for hundreds of years. There are circumstances in which an NPV analysis might give distorted data. For instance the risk of natural disaster in an area can increase the odds of failure of a project particularly if the project is time sensitive. A project with a higher NPV geographically located in the Caribbean region during hurricane season might be not chosen by a conservative risk adverse investor that feels that a project in the middle states of the Unites States has a lower risk of being hit by a natural disaster that could lead to project failure.

References Besley, S., Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Fort Forth: The Dryden Press.