Before a firm\'s management can apply NPV as a capital budgeting technique to ev

Question

Before a firm's management can apply NPV as a capital budgeting technique to evaluate a project it must, as we saw in last week's module, determine the "relevant" cash flows. Once that has been done, it must then determine the rate that will be used to discount the expected future cash flows.

Discuss, from a strictly intuitive standpoint, some of the stumbling blocks you can envision that may prevent proper assessment of the cash flows and that may result in either excessive or insufficient discounting of the expected future cash flows. Briefly explain what the consequences of such misevaluations might be. If appropriate, offer any thoughts on possible remedies.

Explanation / Answer

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