Question

NPV or Net Present Value is a value set to represent cash flows or cash amounts from a set period of time. It is primarily used for budgeting purposes and investment planning as it helps us to analyze a projected cost or a projected budget. The NPV does have some disadvantages which is a lack of awareness for discounted rates and discounts applied. A break-even analysis is primarily used as a technique in management used to measure production. It figures total fixed and variable costs in relation to sales. This allows us to determine the volume of sales produced. This figure allows a business to keep track of either a net loss or profit throughout a fiscal year or within a given time period. This tool is often used to help to determine the minimums needed to avoid losses within a business. The Schiller P/E is used to measure the market values. It is also used to help eliminate fluctuation in the market place to iron out a numeric value as close as possible with consideration of the market fluctuations. It is figured by the company’s current position in the stock market compared to its price of earnings per share. This will help give a more average and accurate portrayal of the market representation.

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Answer 1

There are different methods used in budgeting, capital expenditure projects or valuing the stock price. Though each method has its own advantages and disadvantages. NPV is very good when a firm wants to know the net wealth amount that will be added to the firm if a particular project is to be done. But, it requires the projects to be of equal time period. But for the many projects to be evaluated, and of different life terms, it is better to go for the capital rationing or for the profitability index or to go for the annual worth analysis. On a similar note, when firm is conscious about discount rate, then firm should opt for the internal rate of return. It will serve the purpose in a better way.
Breakeven analysis is a good way to understand the volume of sales required to cover the variable cost and fixed cost. But, it does not tell the time value of money consideration. So, it is good when it is within one year period. On a similar note, P/E ratios is good for the comparative valuation and when the stock is newly launched and lesser data is available. But, it does not speak about the fundamentals of the company and the inherent strengths and weaknesses associated with the firm. For that purpose, free cash flow valuation or dividend based valuation should be used. Though these models take time and cannot be calculated quickly. So, as per the requirement, the different valuation methods are used.