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Essay / Research Paper Abstract
This 5 page paper explains and demonstrates the use of net present value and internal rate of return as discounted cash flow methods of assessing investments. The writer then considers which method is superior. The paper includes example calculations. The bibliography cites 5 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TENetPVIR1.rtf
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Unformatted sample text from the term paper:
is not the same in the future as it is today prices increase, there is inflation, and even if there were not inflation there is the opportunity cost, for example,
if the investor is looking to choose between investing in a project and putting cash into the bank there is the return that the bank would give on the funds
that would increase the numerical value and indicates the alterative that would be available if the investment did not take place (Cyhadwick, 2004) The solution to this is to
assess the projects using a discounted cash flow, to account for inflation, or the cost of the capital which, the rate of return required may also be adapted to include
a risk premium (Howells and Bain, 2003). This allows projects to be assessed. Two main tools are used; the first is the net present value, this takes the future net
cash inflow for a project and then discounts it but the pre determined discount rate1 to give a net present value, if the figure is positive then the hurdle rate
is meet, however, if the result is a negative figure then the hurdle rate is not met (Watts, 1996). The benefit of this is that by creating a single
output figure for the value of a project it is possible to compare a wide range of different project types over a range of terms. The best way of looking
at this is to give an example. In this we will assume that there is a project which will last for five years, giving a net inflow of cash of
4,000 a year, but to undertake the project will take an investment of 10,000, with an end value of 1,000 that can be realised at the end of the fifth
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