Traditional Methods For Evaluating The Capital Investments Essay

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Answer 1

Suggest a methodology to supplement the traditional methods for evaluating the capital investments of your selected company in the emerging markets to reduce risk. Provide a rationale for your suggested methodology.

Net present value in conjunction with internal rate of return are the best methods for evaluating the capital investments of your selected company in the emerging markets to reduce risk.

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept dictates that the only investments that should be made are those with positive NPV values.

Determining the value of a project is challenging because there are different ways to measure the value of future cash flows. Because of the time value of money (TVM), money in the present is worth more than the same amount in the future. This is both because of earnings that could potentially be made using the money during the intervening time and because of inflation. In other words, a dollar earned in the future won’t be worth as much as one
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