Question

When it comes to evaluation techniques like NPV, break even analysis and Schiller’s P/E all three techniques have one thing in common. That one variable that fits all three is limitations. Each of these thee techniques have their own set of limitations that make each technique not the best option to use. When it comes to the NPV technique, it does not take all the needed factors into consideration when used to evaluate a project. The NPV method in its most simple form only looks at the total cost and cash-in flows for that time frame but it does not take into account any change in the discount rate. If this is not done, the projection would not be correct and could make the decision a mistake for the company. The break-even analysis is not the best technique to use because it uses very few factors into consideration when it is used. With this being done it is a waste of time, money and labor when used to determine a evaluation for a company. Schiller’s P/E uses to long of a time frame when it is used. It looks at the ten year average but it does not take into most of the changes that occur.

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Answer 1

All three techniques have its own set of limitations and advantages . Taking one shot at each we conclude the following limitations :

1. NPV analysis dies not account for discount rate and hence analysis could brcome complex and financial transactional value too becomes tedious in inflation terms.
2. Schiller PE also takes long term effects but does not consider short term gains which accrue majorly over short frames in various projects
3. Break-even analysis is more generic and beautifully ignores various terms like inflation and opportunity costs.

It is best to calculate combination of all above three analysis and take various other projected analysis like benefits to cost ratios which also give an indication of benefits firms can accrue. It is best to carry valuation methods if firms are on verge of mergers and acquisition using Discounted cash flow model and double depreciation methods to effectively guage expected debt as well as flow of revenues with inflation indexing.

It is the combination of best practices and use cases which deliver maximum accuracy and success in execution. Firms must have sufficient project management teams to deliver this kind of analysis which optimises the entire valuation and analysis of projects and firms and thus helps in overall risk mitigation, revenue mobilisation and faster alliance in market to shape the future in effective way.