01 May 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. Please respond to post in at least 200 words
Each of these techniques can be useful as they all provide a different analysis of the same information. The best way to use them may be to use more than one and base your decisions on multiple pieces of information rather than one thing. NPV or net present value takes into account the cash inflows and outflows of a project relative to the current value of $1. The main limitation of NPV is that it is not an exact science; it involves a great deal of guessing which can cause issues in the end. Breakeven is used to determine how much revenue is needed to cover all costs. This can be helpful in determining when an organization will make a profit. A limitation is that the equation is too simple. It does not have a way to factor in the inevitable changes in price or costs. Shut down uses breakeven to determine if a company should shut down. However, it does not include fixed costs at all. Schiller P/E utilizes earnings adjusted for inflation. The biggest issue with this is that it takes into account the past ten years which may not reflect the current trends. Another thing I noticed is that none of these methods consider hidden or opportunity costs.
Please respond to post in at least 200 words
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