01 May Question: When it comes to evaluation techniques like NPV, break even analysis and Schiller’s P/E all three…
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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