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Essay / Research Paper Abstract
This 8 page paper explains the use of net present value and internal rate of return, showing how to perform the calculations and looking at the advantages and disadvantages of using each of the discounted cash flow models. The bibliography cites 4 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEnetpres.rtf
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Unformatted sample text from the term paper:
or to raise capital for investment, this means that any investment will have an opportunity cost. The opportunity cost is the return that is lost from projects or investments that
cannot be undertaken. For example, if an investor has a choice of two investments, one giving a 100 return and one with a 200 return, then, as long as the
risk is the same they will want to ensure that they take the most profitable investment, The opportunity cost is the amount that the alterative investment would have made.
In simple teems this is easy, but when it comes to long term projects the comparison is not as easy, cash flows may be very different and vary over time,
it is also possible that there will not be the same term or eve the same risk. To make comparison easy it is necessary to use some type of tool
that will allow a comparison on a more like for like basis. One tool that has been used effectively is that of the net present value. This is a tool
that takes the net cash flows of an investment or project and discounts them into todays terms. However, NPV is only one tool, there are also others, such as
international rate of return, this is an alternative measure, and for some this is a better measure, but it can also be argued as being more sensitive. To assess both
of these measures, which are both discounted cash flow measures we need to look at each and assess how they are used. If we look at
the use of net present value is a tool that takes the future cash flows of a project and then discounts then to todays value by taking inflation and interest
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