Final answer:
While NPV is a key indicator of a project's profitability, capital budgeting decisions should not be solely based on NPV. Other considerations such as risk, strategic fit, and alternative financial metrics are also important. Combining NPV with other criteria provides a more comprehensive evaluation of a project's viability.
Step-by-step explanation:
The question asks if capital budgeting decisions should be made solely on the basis of a project's Net Present Value (NPV), without considering other criteria. While NPV is a fundamental indicator of a project's profitability, it is not the only factor that should be considered. Other important considerations include the project's risk profile, the time horizon, the impact on the overall strategic direction of the company, and potential synergies with existing projects or systems.
Moreover, real-world decision-making involves various complexities, and relying solely on NPV could be an oversimplification. For example, decision-making in corporations often involves considering the broader economic environment, competitive landscape, and the firm's financing capacity. Comprehensive decision-making would typically involve a combination of various financial metrics such as the Internal Rate of Return (IRR), payback period, and profitability index, alongside NPV, to provide a holistic view of a project's viability.