popular methods are average rate of return, cash payback, netpresentvalue and internalrate of return method. Some of these methods focus on presentvalues and some ignore it.However, some benefits of capital investments are of qualitative nature. These benefits cannot be readily estimated in dollar...
does not take account of the
variability of those cash flows
Netpresentvalue and internalrate of return
Discounting cash flow allows you to put cash flows received at different times on a comparable basis. You can use discounting cash flow to evaluate potential investments. There are two...
discounting; explain the concepts of netpresentvalue (NPV), internalrate of return (IRR), payback method and accounting rate of return (ARR); calculate NPV, IRR, the paybackperiod and ARR; justify the superiority of NPV over the IRR; explain the limitations of payback and ARR; justify why the payback...
capital projects. The higher a project's internalrate of return, the more desirable it is to undertake the project.
PresentValue Index (PVI) / Benefit-cost ratio /Profitability index: is the presentvalue of a project’s future cash flows divided by the initial investment. The project will be...
NetPresentValue and Other Investment Criteria
List the methods that a firm can use to evaluate a potential investment.
1) Accounting rate of return: ARR is a non-discounted cash flow method in which accounting information are used.
an investment proposal is positive, the required rate of return is greater than the return that will be generated by the investment.
False. A positive netpresentvalue indicates that the investment is earning more than the minimum required rate of return.
3. The internalrate of return is the...
. Popular methods of capital budgeting include netpresentvalue (NPV), internalrate of return (IRR), discounted cash flow (DCF) and paybackperiod.
Cash flow projections are similar to the creation of budgets; however, unlike a budget, it is used to forecast a company’s cash income and expenditures...
. However, both metrics (PI and AvgROI), result in conclusions contrary to both the calculated PaybackPeriod and Discounted PaybackPeriod.
NetPresentValue and InternalRate of Return
Both NPV and IRR consider all cash flows, the time-value of money, risk, and unlike the previous metrics...
Proposal -4 5
Proposal -5 5
Calculate the IRR of proposal one to five: 7
Requirement: 2 10
Calculate the Profitability Index (PI): 10
Requirement: 3 12
Discuss Other Factors: 12
Requirement: 4 13
IRR is more effective then NPV 13
ϖ Superiority of netpresentvalue: 13
can be classified in two ways. First, is to create one category for benefits that affects levels on the profit and loss statement directly. Secondly, specify benefits that may not be as easily measured on a statement of profit and loss.
NetPresentValue (NPV), PaybackPeriod, InternalRate of Return...
Flows Discounted PaybackPeriod Economic Rate of ReturnInternalRate of ReturnNetPresentValuePayback Method PaybackPeriod Weighted Average Cost of Capital
1.0 Introduction The payback method is commonly used for appraisal of capital budgeting investments in...
rate of return method
3. payback method
4. internalrate of return method
(Mott and Graham 2008, p. 207).
The first two methods are considered the common non-discounting criteria, whilst the
other two are the most popular discounting criteria. (Chandra, 2011).
paybackperiod, the accounting rate of return (ROI), the cost–benefit ratio, the netpresentvalue, the profitability index, and the internalrate of return (IRR).
The Payback Method
The payback method is quite simple: It is a measure of the time required to pay back the initial investment of a...
the discount rate that equates the presentvalue of the future net cash flow from an investment project with the project’s initial cash outflow”
Clearly shows the profitability of the investment.
Doesn't take account of the fact that future returns may be less...
Incremental Cash Flows
1. Weighted Average Cost of Capital = %Equity x Rate + %Debt x Rate x 1-tax rate
WACC = [75 *.12] + [25*.10* (1-.30)] = 10.75%
Discount rate = discount factors at 10.75% WACC
2. Net Income
The Income Statements, Cash Flows, NetPresentValue, Internal...
consider cash flows after the paybackperiod and it does not consider the time values of money; a common practice is to use this method to select from projects with similar rates of return that have been evaluated using a discounted cash flow method referred to as the Payback Method based on...