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Essay / Research Paper Abstract
Net present value calculations appear to be a logical and intuitive way of helping with the assessment of potential investments. This 3 page paper looks at how the process takes place and where there are gaps between the theory and the practice. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEgapNPV.rtf
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Unformatted sample text from the term paper:
discounting them and then comparing the result to alternatives in order to make the best decision. The process is one which has many advantages; the process allows comparisons to be
made between different types of investments, from financial investment tool to investments in developing new facilities or other projects over different time periods. The same process can be utilized for
all of the investment opportunities and give a simple easy to compare with an answer. Different aspects of the project can be managed, for example, the way that the risk
is assessed can be accommodated by increasing the required rate of return in the discount rate that is applied with an increased risk premium, and changes in the potential revenues
may be undertaken with different calculation that can be weighted according to the potential likelihood. However there are still gaps in what the model can do theoretically and how it
is used in practice. The output of the model is a figure that transforms the future revenues streams into a single figure which can be used tom make comparisons. This
can be indicative of the second main advantage; that of an easy to understand output that can be used easily. However, there
are some current disadvantages with this type of calculation that take away from the intuitive nature of the tool and indicate the presence of gaps. The first is that to
use this tool there need to be assumptions, such as assumption of the interest rates, cost of capital and/or inflation rates. Small changes in any of these assumptions can lead
to significant differences in the final figure. Furthermore, eve if there is an accurate assessment of the current influences they are highly likely to change over the period of the
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