DefinePK

Abstract

For project evaluation, the net present value (NPV) criterion is the mostpreferred one. It attaches a pre-fixed opportunity cost to initial investment.Therefore, it ranks projects by the amount of profit. It favors bigger sizeprojects. If supply of capital for a country is limited, then individual firms’project selection by the NPV criterion may lead to less than potential level ofoutput, a flaw of this criterion. The other flaw is that its formula does notaccount for the opportunity cost of initial investment if a project is to befinanced by owners’ capital. Consequently it overestimates NPV of suchprojects.