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I am able to understand”using a planning period or a specified investment appraisal time horizon is a way of reducing the uncertainty associated with investment appraisal, since this increases with project life. “, which is mentioned in Dec 2010 answer Q 1 b, but I am confused about the answer of Dec 2007 Q2 c ” …while uncertainty increases with increasing project life.”
I just wonder the correct relationship between uncertainty and project life.All future cash flows are going to be just estimates and are therefore uncertain.
In practice you are likely to be reasonably confident about your estimates for next year, but the further into the future you are forecasting then the more of a guess it is going to be and therefore the more uncertain you will be.
Forecasting the flows in 10 years time is really going to be a pure guess – in practice you have absolutely no idea how well or badly things will be going in 10 years time.
By limiting the period we look at to only a few years, then if the NPV is positive we are going to be fairly confident that the project is worthwhile whatever happens after that period.
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