Explain net present value and internal rate of return methods in business finance?
how would you explain the different rankings given by the net present value and internal rate of return methods? when referring to a companies cash flows and finances.
Budget and Finance- Present Value etc.?
1. Ingrid can earn a nominal annual rate of return of 12%, compounded semiannually. If she made 40 consecutive semiannual deposits of $500 each, with the first deposit being made today, how much will she accumulate at the end of year 20? 2. How much money must you pay into an account at the beginning of each of five years in order to have $5,000 at the end of the fifth year? Assume the account pays 12% per year. 3. You are considering a home loan with monthly payments at an annual percentage yield of 5.116%. What is the quoted rate of interest on the loan?
What is the purpose of a cash flow budget?What does it reveal? Of what value would it be to an entrepreneur?
To see if you are going to generate enough cash to cover operating expenses, debt pmts, personal expenses, etc. High value if estimated somewhat accurately.
Bus. Finance HW Problem Help (NPV,IRR,PI)?
The following calculations were performed using this online capital budgeting calculator at http://finance.thinkanddone.com/online-capital-budgeting-calculator.html At a cost of capital of 10% Project X provides higer return on investment and it holds true when cost of capital drops to 5% Project X -10000 6500 3000 3000 1000 WACC = 10% IRR = 18.03% Annualized IRR = 18.03% MIRR = 13.48% Discounted Payback Period: 2.72 years. Payback Period: 2.17 years. NPV = 1325.39 NFV = 2134.55 Profitability Index: 1.13 Equivalent Annual Annuity/Cost (EAA|EAC): 418.12 Project Y -10000 3500 3500 3500 3500 WACC = 10% IRR = 14.96% Annualized IRR = 14.96% MIRR = 12.89% Discounted Payback Period: 3.54 years. Payback Period: 2.86 years. NPV = 1094.53 NFV = 1762.75 Profitability Index: 1.11 Equivalent Annual Annuity/Cost (EAA|EAC): 345.29 Project X -10000 6500 3000 3000 1000 WACC = 5% IRR = 18.03% Annualized IRR = 18.03% MIRR = 13.48% Discounted Payback Period: 2.72 years. Payback Period: 2.17 years. NPV = 1325.39 NFV = 2134.55 Profitability Index: 1.13 Equivalent Annual Annuity/Cost (EAA|EAC): 418.12 Project Y -10000 3500 3500 3500 3500 WACC = 5% IRR = 14.96% Annualized IRR = 14.96% MIRR = 12.89% Discounted Payback Period: 3.54 years. Payback Period: 2.86 years. NPV = 1094.53 NFV = 1762.75 Profitability Index: 1.11 Equivalent Annual Annuity/Cost (EAA|EAC): 345.29 EDIT: I overlooked the last question The crossover rate was calculated using this online calculator http://finance.thinkanddone.com/online-crossover-rate-calculator.html At 6.22%, both projects have same NPV of $2067.37 Project Y-X Crossover rate = 6.22% NPV of Project X @ Crossover rate= $2067.37 NPV of Project Y @ Crossover rate= $2067.37
What's the difference between return on investment and internal rate of return?
In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than a fraction. ROI does not indicate how long an investment is held. However, ROI is most often stated as an annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, "ROI" indicates an annual or annualized rate of return, unless otherwise noted. ROI is used to compare returns on investments where the money gained or lost — or the money invested — are not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment. $50/$1,000 = 5% ROI $20/$100 = 20% ROI Whereas, The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is an indicator of the efficiency or quality of an investment, as opposed to net present value (NPV), which indicates value or magnitude. The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for an investment is the discount rate that makes the net present value of the investment's income stream total to zero. A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments of equal risk (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium. In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value for the company. In the context of savings and loans the IRR is also called effective interest rate