Which advantage is associated with NPV in financial analysis?

The advantage associated with NPV (Net Present Value) in financial analysis is that it considers risks through the discount rate. This is significant because the discount rate reflects the opportunity cost of capital and incorporates the risk associated with the project’s cash flows. By adjusting the discount rate, analysts can account for different levels of risk—higher risk projects typically use a higher discount rate, which reduces the present value of future cash flows, while lower risk projects can use a lower rate.

This approach allows for a more accurate assessment of a project’s potential profitability, as it provides a way to evaluate not just the expected cash flows but also the uncertainty and risk related to those cash flows. Therefore, incorporating risks into the discount rate enhances the decision-making process regarding investments and capital allocation.

In contrast, ignoring risks would lead to misleading conclusions about the viability of projects, and while NPV can sometimes be used to compare dissimilar projects, it is not inherently designed for that purpose. Lastly, NPV does require detailed financial projections to ascertain future cash flows accurately, making the option stating that it does not need such projections less valid.