Which of the following is a limitation of NPV?

Net Present Value (NPV) is a widely used financial analysis tool that evaluates the profitability of an investment by discounting future cash flows back to their present value. However, one of the limitations of NPV is that it assumes all future cash flows are certain, which is reflected in the chosen answer.

The assumption of certainty can lead to unrealistic expectations, as future cash flows are often subject to variability and risk. In the real world, factors such as market conditions, changes in consumer preferences, and economic fluctuations can impact the reliability of projected cash flows. Therefore, while NPV provides a useful framework for assessing investment opportunities, its reliance on the assumption of certain future cash flows can be a critical limitation.

Additionally, the other options highlight aspects that do not serve as limitations of NPV. For instance, NPV can indeed compare projects of different sizes by evaluating the present value of cash flows relative to the initial investment, which means that this aspect is not a limitation. Similarly, while NPV does ignore sunk costs—costs that have already been incurred and cannot be recovered—this is considered a strength of the NPV method. Lastly, determining the cost of capital can sometimes be challenging, but this does not inherently limit the NPV calculation