Final answer:
The main limitation of the net-present-value approach is that it does not fully capture long-term planning needs and the impact of future benefits and costs that may be far-reaching, especially when evaluating environmental policies. It also assumes a level of rational decision-making and access to information that may not align with actual business and societal behavior.
Step-by-step explanation:
The primary shortcoming of the net-present-value approach when ranking economically feasible projects is its inability to fully account for the long-term aspects of strategic planning and impact. The net-present-value (NPV) method focuses on comparing the present costs of an investment to its future benefits that are discounted back to the present.
However, this approach can fall short in evaluating the long-term needs and assets, making it challenging for organizations to plan for extended impacts and programmatic sustainability.
Additionally, NPV does not handle scenarios where future conditions may evolve in non-linear ways or where benefits and costs extend well into the future, such as with environmental policies like carbon dioxide emissions and their potential impact on global temperatures.
NPV is heavily reliant on accurate predictions of future cash flows and the chosen discount rate, which itself is subject to uncertainty and can significantly influence the NPV. For investments that may have a profound impact many decades in the future, a small change in the discount rate can lead to a large difference in the calculated NPV, complicating the decision-making process.
Moreover, NPV calculations generally assume that firms and individuals make highly informed and rational financial decisions, which often does not reflect the actual, more complex behavior of people, firms, and society. Indeed, the economic decision-making model may oversimplify the unpredictability and behavioral nuances that characterize real-world business and policy decisions.