Reply to the following using at least 175 words per post. Be professional and constructive. Be sure to use FULL APA references and in-text citations.
1. Net Present Value(NPV): means present and future cash flow value, it compares against the capital investment, positive and negative over the entire time of investment. NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, cost reduction, and anything that involves cash flow.
Internal rate of Return (IRR): is the discount rate that makes the net present value(NPV) of a project zero. It is the expected compound annual rate of return that will be earned on a project or investment.
Payback method: This is considered a method of analysis with serious limitations and qualifications for use. Also the calculation an organization is getting from an analysis used on return of investment. Because the payback method does not account for the time value of money risk, financing, or other important considerations.
NPV Disadvantage: a disadvantage is over time the cash value diminished over time, it’s less than, it’s not the most accurate tool.
NPV Advantage: With its cash flow, you can see the value of your investment.
Payback advantage: seems to show the simplest method tool among the three. Can be used as a stand-alone method, to compare investments.
Payback disadvantage: The money cash flow has to be equal, it can not be uneven cash flow.
For example, if an organization invests, the payback method can evaluate the number of months or years it would take, to return on that investment.
Reference
Zhang, G. (2000). Accounting Information, Capital Investment Decisions, and Equity Valuation: Theory and Empirical Implications. Journal of Accounting Research, 38(2), 271–295. https://doi.org/10.2307/2672934
Good discussion on the different analysis types. Companies may use a variety of analysis tools and financial information to make critical operating and investment decisions. One of those tools, as you discussed, is internal rate of return. The IRR measures how well a project, capital expenditure or investment performs over time and helps companies compare one investment to another or determine if a project is viable. When considering a viable project, what is the relationship between the desired rate of return and the internal rate of return? Provide examples!
2. What is Capital Analysis of Investment?
Analysis of capital investment is a budgeting process used by corporations and government agencies to analyze long-term investment’s prospective profitability. Analysis of capital investment evaluates long-term investments that may include fixed assets such as equipment, equipment or real estate. The aim of this procedure is to discover the alternative to generate the greatest return on capital invested. Companies may use different methodologies to carry out an analysis of capital investment involving the calculation of the projected value of future project cash flows, the funding costs and the project risk-return.
Capital investment is hazardous since it involves large, initial expenditure on long-term service assets, which will take time to pay for itself. An investment return higher than the hurdle rate or necessary rates of return of shareholders in a firm assessing a capital project is one of the basic conditions for the company.
The Net Present Value (NPV), which calculates the value of the anticipated revenues from a project, known as future cash flows, in current dollars, is one the popular methods for capital investments analysis. The net current value indicates that future cash flow or income are sufficient to pay the project’s initial investment and associated financial expenditures.
Discounted cash flow (DCF) is comparable, but slightly different, to the net present value. The current cash flow value for NPV calculates the original investment and subtracts it. The DCF analysis is essentially a part of the NPV calculation since it is the discount rate procedure or an alternate return rate that measures the value or not of future cash flows.
Investments are popular in the DCF that are projected to produce a fixed annual rate of return. It takes no account of any start-up expenses, but simply assesses the value of the return rate on future projected cash flows on the basis of the discount rate used in the formula.
Reference
Introduction to Capital Investment Analysis (investopedia.com)
Good points. Managers of companies often face difficult decision making with capital investment decisions among the most challenging. What makes this kind of decision so difficult is not the problem of projecting return on investment under any given set of assumptions. The difficulty is in the assumptions and in their impact. Each assumption involves its own degree of risk and uncertainty; and combined, these uncertainties can multiply into a total uncertainty of critical proportions. Managers must be able to evaluate the level of risk resulting from the investment analysis performed. How do capital investments affect overall company profitability? Provide specific examples.
