Q1. Please compare the advantages and disadvantages of the following investment rules: Net Present Value (NPV), Payback Period, Discounted Payback Period, Average Accounting Return, Internal Rate of Return (IRR) and Profitability Index (PI). (You can start by considering the following questions for each investment rule: Does it use cash flows or accounting earnings? Does it consider all cash flows or not? Does it apply a proper discount rate? Whether the acceptance criteria are clear and reasonable? In what situation it can be applied? What kind of weakness does it have?) (4 points)

Firstly, Average accounting return (AAR) is calculated by dividing the average net income by the average book value. A project is accepted if the AAR is greater than a preset rate. However, the discount rate value of money is ignored. Also, it uses accounting earnings which include net income and book value of an investment. In capital budgeting, we use cash flow instead of accounting earning because it is more accurate in calculating budget. Also, the accounting numbers are arbitrary, for example, net income includes depreciation expense which is not an actual payment for every year.

Payback period has a disadvantage that it does not discount the amount in future back to present time. Even Discounted Payback Period uses the discount rate, these two methods only calculate the time period required for to recover the initial investment. After calculating the required time period, the cash flow after that period will be totally ignored. Therefore, it would be a disadvantage for Payback period and Discounted Payback Period because the amounts after payback period do matter in some aspects.

Only Internal Rate of Return (IRR), Profitability Index (PI) and Net Present Value (NPV) use all cash flow and discount value.

...Internal Rate of Return (IRR) and Net Present Value (NPV) are both powerful tools used in business to determine whether or not to invest in a particular project; both methods have its pros and cons. If given a choice I would choose NPV, because of the potential to anticipate profitability.
As it is assumed that the objective of a firm is to create as much shareholder wealth as possible for its owners through the efficient use of resources, the preferred method in determining...

...Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method....

...
Study Guide for Final Exam – fin 301 (WC)
calculation of price of bonds
calculation of YTM for bonds
calculation of yield to call for bonds
calculation of current yield/capital gains yield for bonds
calculation of coupon interest rate/PMT for bonds
effect of change in interest rates on price of bonds
Bond sensitivities/Bond theorems
calculation of capital gains yield
calculation of expected total return using expected dividends, stock price and growth rate...

...International Risk Paper
Organizations encounter financial risks in business everyday, especially when looking at capital budgeting. An organization can use capital budgeting techniques like; cost of capital, Net Present Value, and Internal rate of Return to value the amount of risk the organization is willing to take. When an organization decides to venture into the international arena different risks need to be analyzed. Some of the main International investment concerns...

...economic risk+operational risk = business risk + financial risk = total firm’s risk
EVA = EBIT – TAX = the aftertax operating profit (sometimes referred to as net operating profit after taxes or NOPAT)
* Less the dollar cost of the capital employed to finance these assets = COST OF CAPITAL
Invested Capital =
Cash +
Net fixed assets +
WCR (investment the firm must make to support its operating cycle is the sum of its inventories and accounts...

...understanding of Finance function of a corporation and build capacity to apply theory in real world situations. The course will present the ‘Big Picture’ of Corporate Finance so that students understand how things fit together. After successfully completing the course, students should be able to take optimal decisions in a corporate setting, when working as professionals in the field.
COURSE OUTLINE
Introduction to Corporate Finance:
Financial...

...to account for business risk when assessing the viability of investments.
Introduction
Capital investment is a long term investment on non-current assets that will bring wealth to a business and because finance is costly and scarce, risks need to accessed before any decision is made. Certain methodologies are used to analyse whether investments are worthwhile and will add value. In the following paper I will discuss these methods and explain the...

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