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Essay / Research Paper Abstract
This 3 page paper assesses an investment using figures supplied by the student. The paper demonstrates the use of payback period, net present value and internal rate of return. The paper is written in the style of a memo. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEinvqu1.rtf
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Unformatted sample text from the term paper:
years. In order to determine whether or not this is a good investment the return that is created needs to be assessed. There are several methods that can be used,
these will help to determine not only whether or not the project will create a profit, but also allow for an assessment that will allow it to be compared to
other potential investments. The first method of assessment is the payback period. This is a simple calculation looking at how quickly the firm will be able to recoup
the initial investment. Once the investment is recouped then it may be available for investment elsewhere. When looking at the cash flows shown in figure 1 it is possible to
see that the full repayment of the initial investment will take place by the end of year 3. Figure 1 Payback period Year 1 Year 2 Year 3
Cash flow 500,000 350,000 475,000 Accumulative cash flow 500,000 850,000 1,325,000 In order to assess the exact payback period we need to look more closely at year 3, where only
450,000 of the 475,000 revenue is needed, divided what is needed by the amount earned gives 0.951 so the payback period is actually 2.95 years (Chadwick, 2004). This is within
the required five year period required by the firm to make an investment viable. However, this does not tell us what the value of the investment in todays money, so
this we can use the net present value technique so we can take the cash flows and then discount them, and find the net value after deduction of the investment.
The discount rate used is 6% as this is the firms cost of capital. This is shown below. Figure 2 Net present value Year Profit Discount rate Discounted cash flow
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