What question did this study set out to answer?

The aim is to explore situations where the NPV rule may lead to incorrect financial decisions.

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June 15, 2026

Capital Budgeting: Some Exceptions to the Net Present Value Rule.

Key Points

The aim is to explore situations where the NPV rule may lead to incorrect financial decisions.
Presented numerical examples illustrating when NPV results in erroneous decisions.
Analyzed the assumptions behind the NPV rule and real-world applicability.
Demonstrated specific cases where the NPV rule contradicts optimal firm decisions.
Showed that failing to meet NPV assumptions leads to suboptimal investment choices.

Abstract

Abstract Textbooks tend to emphasize the net present value (NPV) rule, often arguing that it is theoretically superior to other methods. Yet other methods, many of which do not involve discounting, are also used in practice. Hence, one of two conclusions can be drawn: (1) firms are making suboptimal decisions or (2) the assumptions underlying the NPV rule are not always met in practice. The purpose of this paper is to present simple numerical examples wherein applying the NPV rule leads to erroneous decisions. The examples highlight the assumptions underlying the NPV rule.

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