Provide 1 response to each student post. Each response should be 150 words each. Turnitin and Waypoint is being used to check for plagiarism and Please use APA format. Please pay close attention to plagiarism, and it's not tolerated.
2:05pm Jul 17 at 2:05pm
In the business world, people have to make decisions on how to invest the capital of the organization. The reality is that the money can only go to a select few projects, and there is never enough money to invest in everything a business wants to operate in. The Net Present value discounts the value of the cash as the current value associated to the project cost. The outcome is that NPV shows the dollar value that a project should product (Bragg, 2018). The formula helps to determine the cost of the project and the valuation of the money spent. This is why the formula takes into account the interest rate that will be paid (The difference, 2019).
When looking at the interest rate of return, this method takes into account the return as a percentage when the net present value is at zero. IRR is also considered the metric to look at when determining the breakeven point for cash flow. IRR also provides an advantage as it doesn’t take into account a discount rate. The NPV has to incorporate a discount rate that is derived, which is sometimes hard to reach.
The payback method is used to help business quickly determine how quickly they can recoup the initial investment. The method takes the initial investment and then determine the monthly and yearly cashflow to pay back the investment. Almost 50% of the companies surveyed indicate that the payback method plays a relatively important role in capital budgeting decisions, and the degree of the importance varies among firms (Chen, 1994).
Reference
Bragg, Steve. (2018). Payback Method / Payback period formula.
Accounting Tools.Retrieved from
https://www.accountingtools.com/articles/2017/5/17/payback-method-payback-period-formula(Links to an external site.)
Chen, S., & Clark, R. L. (1994). Management compensation and payback method in capital budgeting: A path analysis.Accounting and Business Research,24(94), 121. Retrieved from https://search-proquest-com.proxy-library.ashford.edu/docview/198180753?accountid=32521
The difference between present value (PV) and net present value (NPV)(2019). . New York: Newstex. Retrieved from https://search-proquest-com.proxy-library.ashford.edu/docview/2251251890?accountid=32521
Kagan, Julia. (2019). Compound Interest.
Investopedia.Retrieved from https://www.investopedia.com/terms/c/compoundinterest.asp
12:57pm Jul 17 at 12:57pm
Compare and contrast the Internal Rate of Return (IRR), the Net Present Value (NPV) and Payback approaches to capital rationing. Which do you think is better? Why?
Per Byrd, Hickman, and McPherson (2013) capital rationing (limited capital budget) is a type of project dependency. In other words what is the method in which the organization plans the project will be paid. Another important process when making investment decisions on projects is ranking the projects based off the information gathered from rates of returns. The ratio given determines how attractive the investment is, the higher the ratio the better. There are four capital investment evaluation methods: net present value method (NPV), internal rate of return method (IRR), payback period method, accounting rate of return method. According to Schneider (2017) these two methods utilize the time value of money while the other two have serious flaws. Commonly in my organization we use the wording of “return on investment” (ROI), which is gain from investment - cost investment/cost of investment.
NPV - The net present value method will give us the desired rate of return or the slowest rate acceptable by the organization of making a return as it is affected less due to lower discount rates. Kenton (2019) states there are setbacks to utilizing NPV as it assumes and estimates things like investment cost, discount rate, and projected returns.
IRR – works best with projects that where cash flows occur early in the project. According to Byrd, Hickman, and McPherson (2013) internal rate of return assumes rate or return is compounded at a higher rate.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from
https://content.ashford.edu/(Links to an external site.)
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from
https://content.ashford.edu/(Links to an external site.)
Kenton, Will. “Net Present Value (NPV).” Investopedia, Investopedia, 24 Apr. 2019,
www.investopedia.com/terms/n/npv.asp(Links to an external site.).
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