An initial investment is the money a business owner needs to start up a firm. It might include the business owner's own money, money borrowed from an array of sources including family and friends or banks, or capital raised from investors. The term initial investment is also used as the money a business owner uses to invest in a capital investment venture such as a piece of equipment or a building.

IRR
The higher a projects internal rate of return, the more desirable it is to invest in the project. Some ways to use the IRR method are: • Discounted Cash Flow Analysis - Find the interest rate return that you would receive as your investment return rate. • Capital Budget Planning - Go through the capital budget process so that you make the best economic decision. • Discounted Cash Flow Analysis - When you calculate IRR you will have one number for an objective comparison between capital projects. • Investment Calculator - Determine if a potential investment is a good choice or not. • Compound Rate of Return - Understand the compounding effect of interest on investments. ("Calculating internal rate,")

Deciding between investments

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.

a. Which investment has the higher IRR?

a)

Since IR is defined as the rate of return that makes the NPV = 0:

...ID: 0022KONS1109
SUBJECT: ACCOUNTING AND DECISION
MAKING TECHNIQUES (ADMT)
LECTURER: MR. S. A. PALAN
CONTENTS
Introduction…………………………………………………………………….………2
Define Capital Investment Appraisal…………………………….………………….…2
Discounted cash flow methods……….………………………….………………….…4
Explanation of NPV…………………… ...................................................................…4
Explanation of...

...benefits of investment wherever possible. Any project which requires an outlay of money or other resources and which then generates a flow of costs and benefits in subsequent periods should be regarded as an investment. The financial appraisal methods helps in guiding whether to incur an expense now so that benefits can be ripped in later periods (investment), or whether the funds should be used to generate immediate benefits, now ( consumption )...

...Case 17 – The Investment Detective
The case of the Investment Detective laid out the cash flows for us in each of eight different projects. Before doing any calculations we came up with the assumption that we could not rank the projects simply by inspecting the cash flows.
Without the ability to rank the projects based off of cash flows solely, we had to use some analytical criteria as a capital budgeting analyst to provide some thorough support and reasoning...

...Analysis
Actually, we can rank the projects by simply inspecting the cash flows. However, it is not a good method to rank the projects. In order to ensure that the investment projects selected have the best chance of increasing the value of the firm, we need tools to evaluate the merits of individual projects and to rank competing investments. In this case, our group using some tools which are Payback Period, Net Present Value (NPV) , Profitability Index (PI),...

...Investment Appraisal
Investment: Spending money into something with an expectation of making profit/ increasing wealth in the future
Investment Appraisal: Is a process of evaluating the attractiveness of an investment proposal using various techniques/methods,
Methods
Payback period
Accounting rate of return (ARR – ROCE)
Investment appraisal
Internal rate of...

...profitability index measures the bang (the dollar return) for the buck invested. Therefore, it is useful for capital rationing (Ross 2005). The investment in net working capital is an important part of any capital budgeting analysis. The Silicon Arts Inc. found its company in a very important decision making position between two cash flows for future business investments. As a new hire for SAI and with a first assignment of analyzing the cash flows using the...

...Present Value and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are
1) Net present value: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost.
NPV = Present value of cash inflow- Present value of...

...Explain the theoretical rationale for the NPV approach to investment appraisal
and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these...

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