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1. Discuss what each type of financial tool is (NPV, PI, ECV…), and what are the strengths and weaknesses of each tool.
NPV: The net present value (NPV) method accounts for the present value of the future cash flows of alternative projects.
simplest method for value maximization and it accounts time value of money. We keep on accepting projects as long as th
values are positive. The disadvantages associated with NPV method is that it ignores probablities and risks. Financial goals
the sole considerations in making decisions. It also fails to consider constrained resources. NPV assumes an all
investiment decision but in real practice, new projects are investments are incremental or differential in nature.
PI: Productivity index (PI) takes into account what NPV fails to consider, that is - probabilities. It assigns probabilitiy weigh
cash flows and discounts them to the present while assuming technical success less R&D costs. Arbitrary assumptions of
probabilities are hard to establish. Probability estimates are, by enlarge, unreliable.
ECV: Expected commercial value (ECV) seeks to determine the maximiumthe value or commercial worth of a project that
considers budget constraints. ECV takes into account probabilities of success or failure as well as risks.; furthermore, it t
account future earning stream of projects while considering the probabilities of commercial and te...
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