NPV vs IRR Every business comes across a number of decisions to be made on a daily basis regarding making investments in different projects. However, making these investments requires a huge analysis and consideration of a number of things.
NPV Decision Rules – Capital Budgeting Techniques Net Present Value is defined as the present value of all expected cash flows generated by the project minus present value of the cost of the project. Net Present Value = Present value of all expected cash inflows – Present value of the cost of the project
Project Analysis – Capital Budgeting Techniques Net Present Value Example We are considering following project for investment purpose. Initial cost of the project: $800,000 Project Life: 5 years Annual Net Operation Profit:… Read More »
How to Calculate Net Present Value For example we are planning of starting a business of producing and selling pesticides. We can estimate the initial cost with reasonable accuracy because we know what we will need to buy to begin production. Would this be a good investment? It depends, whether its value exceeds its initial cost or… Read More »
Independent and Mutually Exclusive Projects Understanding of classification of capital budgeting projects plays a crucial role while analyzing viability of projects. What is mutually Independent Projects? A Project whose cash flows have no impact on the acceptance or rejection of other projects is termed as Independent Project (not mutually exclusive). Thus, all such Projects which meet… Read More »
Internal Rate Of Return And Mutually Exclusive Projects……. What’s the Concern? While considering the mutually exclusive projects, IRR technique can be misleading. Investment projects are said to be mutually exclusive if only one project could be accepted and others would have to be rejected. NPV and IRR methods for project evaluation leads to conflicting results… Read More »
Capital Structure and Cash Flows On one hand, operations of the company may help in forecasting of future cash flows but in addition to this, future cash inflows and outflows can also be accessed through company capital structure. A corporation may use different combinations of equity, debt, or mixture of securities to finance its assets… Read More »
Present Value of Multiple Cash Flows We come across many cases where we have to determine the present value of series of multiple cash flows. There are two ways we can calculate present value of multiple cash flows. Either we discount back individual cash flow at a time, or we can just calculate the present… Read More »
Discounted Payback Period One of the limitations in using payback period is that it does not take into account the time value of money. Thus, future cash inflows are not discounted or adjusted for debt/equity used to undertake the project, inflation, etc. However, the discounted payback period solves this problem. It considers the time value… Read More »
Internal Rate of Return Internal Rate of Return is another important technique used in Capital Budgeting Analysis to access the viability of an investment proposal. This is considered to be the most important alternative to Net Present Value (NPV). IRR is “The Discount rate at which the costs of investment equal to the benefits of… Read More »