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Essay / Research Paper Abstract
This 8 page paper looks at the use of Net Present Value and Internal Rate of return calculations for use in capital budgeting. The first part of the paper looks at different potential investments and shows the student examples of NPV and IRR calculations. The second part of the paper looks at both IRR and NPV and discusses the two assessments to determine if one is a superior measure. The bibliography cites 4 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEcapIRR.rtf
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Unformatted sample text from the term paper:
net present value of the investment. This means taking the net cash flows and then applying a discount factor to bring each years cash flow into todays terms. The discount
factor for the first years is the division of 1 by the level of the discount. This is then repeated in following years, but applied to the previous years discount
figure (Watts, 1996). Of we look at the first case given the first discount factor will be 1 all the way through as there is a 0% discount stated. This
is shown below giving a 0% discounted net present value of 435,000. Table 1 Investment A at a 0% discount Year Profit discount rate Discounted cash flow Accumulative total
0 -500,000 1 -500,000 -500,000 1 85,000 1 85,000 -415,000 2 150,000 1 150,000 -265,000 3 700,000 1 700,000 435,000 NPV 435,000
If there is a discount rate of 5% then we will have the same cash flow figures but different discount factors that
will give us the a different result this is shown in figure 2 Table 2 Investment A at 5% discount Year Profit discount rate discounted cash flow Accumulative total 0
-500,000 1 -500,000 -500,000 1 85,000 0.952381 80,952 -419,048 2 150,000 0.907029 136,054 -282,993 3 700,000 0.863838 604,686 321,693 NPV 321,693 In this we assume that
each payment is made at the end of each year not at the beginning. The year 0 figure is not discounted as this is assumed to be an immediate cost.
This shows us that when the NPV is calculated it is 321,693 This tells us that the project is not realising a return equal to 5%. As this is the
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