Question

What flaws might exist with the net worth method?

Answer 1

The main flaws of net worth method are as follows:

-- The method needs little guesswork on the cost of capital of firm. An assumption of cost of capital that is too low can cause making suboptimal investments. In similar way if cost of capital is assumed be too high it may cause in forgoing several good investments.

-- It is not useful method to determine in making a comparison of two projects of different life spans. As the net worth method results in an answer in dollars, the size of the net worth output is computed mostly with the size of the input