Decent Essays

- 1420 Words
- 6 Pages

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 decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
The main stages in the capital budgeting cycle can be summarised as follows:
Forecasting
*…show more content…*

It assumes that project cash flows are reinvested at the company's required rate of return. The IRR assumes that the project cash flows are reinvested at the IRR. Since IRR is higher than the required rate of return, in order for the IRR to be accurate, the company would have to keep finding projects that would reinvest the cash flow at this higher rate. It would be difficult for a company to keep this up forever, thus NPV is more accurate. NPV measures project value more directly than IRR. This is because NPV actually calculates the project's value. If there is more than one project lined up, the manager can simply add the values together to get a total. Often times, during the life of a project, cash flows must be reinvested to cover depreciation. This will give a negative cash flow for that period, thus leading to more than one IRR. If there is more than one IRR, than calculating only 1 IRR for the project is not reliable. NPV must be used for this type of project. When selecting mutually exclusive projects it is wise to use the NPV approach. The IRR approach may lead to a wrong decision. However, when evaluating independent projects, NPV and IRR give the same decision. Most firms use one or more of the measures of financial analysis to prioritise projects. Each of the financial analysis measures has its advantages and disadvantages.

Related

- Decent Essays
## A Project On The Conch Republic

- 1095 Words
- 5 Pages

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

- 1095 Words
- 5 Pages

Decent Essays - Better Essays
## Super Project Essay

- 1477 Words
- 6 Pages

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

- 1477 Words
- 6 Pages

Better Essays - Better Essays
## Compass Records

- 1138 Words
- 5 Pages

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market

- 1138 Words
- 5 Pages

Better Essays - Decent Essays
## Diamond Chemicals Case Study

- 2919 Words
- 12 Pages

NPV and IRR: When examining the NPV and the IRR of the Merseyside project, the numbers were very attractive. It had a positive net present value and an IRR above 10 percent. By these numbers, along with others,

- 2919 Words
- 12 Pages

Decent Essays - Better Essays
## Analysis of The Basilica of St. Denis

- 1477 Words
- 6 Pages

Ziggy Marley once said, “God is like the sun. When the sun shines, it shines for everyone. God is for everyone.” In the same way, Abbot Suger built the Basilica of St. Denis so that sunlight would flood throughout the building and symbolize the power of God inviting visitors into the cathedral. The Basilica of St. Denis was an artistic response to the rise of the Catholic Church’s power for it was modeled to be a physical representation of heaven, which the church heavily preached upon. (Thesis) As the basilica represented the shift from Romanesque architecture to Gothic, Abbot Suger introduced new techniques that transformed cathedrals to look more spacious and “heavenly”. (Map Statement #1-Art History) By allowing sunlight to come

- 1477 Words
- 6 Pages

Better Essays - Satisfactory Essays
## 911 Operator Research Paper

- 131 Words
- 1 Pages

Responsibilities and Daily Activities: Operate a multi-line telephone console system, translate information to the appropriate codes, perform emergency medical dispatch, monitor and operate a radio console, dispatch and coordinate the responses of public safety agencies.

- 131 Words
- 1 Pages

Satisfactory Essays - Good Essays
## Financial Management: Theory and Practice Chapter 10 Minicase

- 1141 Words
- 5 Pages

3. The NPV method is better because it shows the size of the project so you can see how much value a project has not just a percentage. You could have a higher percentage but a much lower value and you would still go for the lower percentage.

- 1141 Words
- 5 Pages

Good Essays - Better Essays
## Pan Europa

- 2191 Words
- 9 Pages

All of the 11 projects are primarily ranked based on quantitative measurements. We have to also take into consideration of other quantitative aspects like length of the project, initial investment and anticipated payback period. Moreover, this

- 2191 Words
- 9 Pages

Better Essays - Decent Essays
## Fsu-Clemon Sports Industry Analysis

- 736 Words
- 3 Pages

Sports is unlike any other business, the product is highly unpredictable, which in turn can heavily impact the consumer’s thoughts and feelings. This means the event can be managed and facilitated perfectly, yet fans may still go home with negativity and disappointment depending upon the result on the field. The following is my consumer perspective for two FSU athletic events.

- 736 Words
- 3 Pages

Decent Essays - Decent Essays
## Phuket Beach Case

- 1683 Words
- 7 Pages

Similarly, Karaoke Beach Pub ranked first in terms of IRR and NPV. Evaluation using IRR might have multiple values and assumes that interim cash flows can be reinvested at the IRR, which may not be as accurate as desired. Using NPV for project evaluations can show actual economic gain with respect to the time value of money. However, it is not appropriate for comparing projects with different lifetimes. Thus, the four criteria are still not sufficient to arrive at a conclusion.

- 1683 Words
- 7 Pages

Decent Essays - Satisfactory Essays
## Answers to Mini-Case Questions

- 1823 Words
- 8 Pages

IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more

- 1823 Words
- 8 Pages

Satisfactory Essays - Better Essays
## Finance Case Essay

- 2944 Words
- 12 Pages

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

- 2944 Words
- 12 Pages

Better Essays - Good Essays
## Compare and contrast the internal rate of return (IRR) and the net present value (NPV) criteria for evaluating investment proposals.

- 2568 Words
- 11 Pages

The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals.

- 2568 Words
- 11 Pages

Good Essays - Satisfactory Essays
## Hansson Private Label case

- 1137 Words
- 5 Pages

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

- 1137 Words
- 5 Pages

Satisfactory Essays - Better Essays
## Project Appraisal Techniques Essay examples

- 2565 Words
- 11 Pages

Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only

- 2565 Words
- 11 Pages

Better Essays