RAP presents a more atomistic view in rational choice making. All actions according to RAP can be reduced to the individual choices of people who initiate the actions. Secondly, RAP assumes that it will be possible to have a clear differentiation between means and ends for both institutions and people. RAP furthermore clarifies the role of the actor in the maximization of personal utility. The human actor will end up choosing that course of action when there is a better maximization. The course of action that helps the human actor become more satisfied will be the motivation for the choices.
RAP also acknowledges that existing knowledge on an outcome will make the person analyse the consequence of their decisions. It will increase the chances of their making a decision, which is more favourable to them. It also gives them the choice of preferences as far as decision making is concerned. They can evaluate their values and the benefits in a better manner when they are aware of the consequences and their preferences. Finally, RAP specifically states that the predictability in human action will increase because of the preference and existing subjective knowledge.
Two examples can be understood when RAP might not be applicable. Firstly, RAP might not perform well for assessing individual choices in decision making because people do not always act rationally. It is human nature to challenge rules and norms and humans might end up violating the norms of rational action more often. Therefore, even if it can be applied in some normative scenarios, it cannot be considered as a descriptive tool to judge and understand individual action. Even when a person is analysing the individual behaviour of another person whose preferences and subjective knowledge are known, he might not be able to judge them properly.
Secondly, there are social contexts where RAP seems out of place. There is multiple subjective knowledge when a decision is made. Cultural social contexts usually invite contingencies that not everybody can be aware of. In such cases, why an individual makes a certain decision cannot be explained satisfactorily by RAP.
The net present value NPV is useful for analysing profitability in investment. A basic premise is that net present value of a dollar in current times is the same value in future. Since the NPV logically draws from the most basic idea of the changing value of money, its most obvious advantage is its simplicity. NPV also holds the advantage of being able to incorporate inherent costs of risk and capital when projecting cash flows.
The disadvantages of NPV are that NPV has a certain amount of guess work involved in understanding the cost of capital of firm and the inherent risks. A lower cost of capital assumption will result in investments that are less then optimal. Hence, this becomes a significant disadvantage by using NPV.
The purpose of breakeven analysis is to assess cost volume and profit relationship in order to understand investments. The breakeven point is where the business will not make any profit nor will it incur any loss. The money generated is the money spent in production. The advantage of the breakeven analysis is that profit and loss can be measured by varying production levels. The corresponding effect on sales can be analysed and future predictions can be made. The influence of fixed and variable costs and the costs on profitability can also be understood better.
The disadvantages in using breakeven analysis are the assumptions made on sales price. More often, the sales price has to be fixed and assumed as being constant across different levels of output. Another disadvantage is that this analysis is only applicable for one product.
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