NPV - What it can't tell you

"What Net Present Value Can't Tell You"

https://hbr.org/2014/11/what-net-present-value-cant-tell-you

Found this interesting article on NPV analysis on HBR.  The author, Maxwell Wessel, had some interesting observations regarding the use of NPV and business investment decisions.    I think this is directly related to some of  Bruce's discussion on valuations and investment decisions in class, especially regarding startups and other transformational projects.    According to the author:

• NPV can usually only project outcomes accurately beyond several years.  
• Some very complex and risky  projects such as the iPod and Kindle would not have had a positive NPV in a short number of years.
• Executives need to think of projects as complex options.  They need to match the valuation methodology to the opportunity.    
• Mark Andressen  suggested that  for VC's the most important questions is "What if it work?" . The problem is most large corporations make decisions differently and instead of buying options on a transformational opportunity,  they invest in only the next logical step.

Large Companies should ask themselves:

1. What if it works; what can you accomplish?   Once you have a sense of upside and of the likelihood then you can start comparing options.  
2. What is required to leave the option open to the upside?  Don't over commit to everything at once.
3. Do you have what it takes to follow through?  If it is wildly successful do you have what it takes to make it work?      

Bottom line, investment decisions can be very complicated with numerous factors, and over-simplification will not lead to the best investment decision.