Portfolio Management

Topics: Net present value, Internal rate of return, Discounted cash flow Pages: 4 (1160 words) Published: April 23, 2013
There are four key principles that Apple should take into concern when deciding their budgeting process. First, when making the decision, cash flows should be the main concern instead of the accounting income. Second, any cash flows will need to be discounted by the opportunity costs. Opportunity costs are the amount of cash flows that will lose by undertaking the project under analysis. Third, according to the time value of money, the cash flows received earlier is preferable to firm. In other words, the timing of cash flow is vital for any projects to have positive outcome. Fourth, tax should be included when calculating cash flows subject to project. Tax can have huge impact on the outcome of any project.

Firms might encounter with two situations when deciding their budgeting process; whether the projects are independent or mutually exclusive. If firms have unlimited budget, they can undertake every project which can increase the wealth of company’s shareholders. However, most firms have constraints on the amount of capital they can raise and must use capital rationing. In the case of limited fund, firms have to choose which project can benefit them most. If the costs of profitable project exceed the budget constraint, firm cannot take the project even if it can produce higher profit. The sequence of project is also a crucial part of a project decision-making. For instance, when firm undertake a profitable project this year; it can create an opportunity to invest into another project one year from now. On the other hand, if the project being takes this year suffers from lose: firm might unable to take the second project one year from now.

NPV method:
There are few methods, which can be used to evaluate the iPhone project. Net present value method is one of the most prevailing methods to calculate and evaluate the project’s cash flow. The NPV of a project is the sum of the present values of all cash flow being generated under the condition of firm...
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