Finance Essay Example | Topics and Well Written Essays - 1000 words - 13

Finance - Essay Examplediscounted retribution period, accounting rate of generate, net present value, intimate rate of return, modified rate of return and profitability index (Shapiro & Balbirer, 2003, pp.242). However, I find realise introduce Value (NPV) as the most reliable capital budgeting technique. I will support my point by providing a thorough comparative analysis of NPV with the four most common techniques, accounting rate of return, payback period and internal rate of return. Each method is explained with the help of numerical examples found in the Appendix.Net Present Value is a technique which takes into account the time value of money. NPV for a project is metric by finding out the present value (PV) of all the future cash flows, which the investment in the project is expected to generate. The PV of future cash flows is found by discounting them at the expected rate of return or cost of capital. Then, shopping centre of the PV of all cash flows is compared with t he cost of investment (Hampton, 1998, pp. 328). The selection criterion of a project is that, if the PV of future cash flows is greater than the sign cost of investment, the project should be selected. In separate words, NPV tells us the present worth of cash flows which would be generated by the project in future hence, if the initial investment that we make today is less that the expected cash flows present value, it means we will round top our cost, only then it will be wise to select a project. The formula to calculate NPV is sum of present values of future cash flows minus initial investment cost. A rule says that both project which has NPV greater than $0 should be selected, however, in case of mutually exclusive projects where you have to make one out of all the alternatives, choose the one which shows a higher NPV. The following paragraphs will tolerate out an in-depth analysis of the advantages and disadvantages of using this technique, so that we muckle have a clear er idea about situations when it can highly aid investment