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Short And Long Term Investment Evaluations Finance Essay

Short-term or long term, in evaluating an investment decision making for businesses with the purpose of evaluation. When taking investment risk, procurement, cost and benefits and many other contexts to pursue accountability involves making. For decades, the managers add value to key objectives and methods of evaluation are to find the right investment.

According to the outpost and Noreen (2000) Property valuation method any company, both tangible and intangible assets held by the treatment is for.

To Götze, according to Yu and Norchoctt, D. & Schuster, P. (2008), "Assessment of investment is less understanding of the company's assets value and uses verschillende verwachte deboned got to make the return tend beperkte to the right to make decisions and the decision should be how the company will have one nice outfit.

Operational matters and strategic planning and management of traditional management accounting techniques to boycott the concentration are modern investment appraisal.

AP programs and projects of investment in various business and technology decision following discussion of the importance of evaluation alights, and discounted cash flow techniques is the effect, while a long-term decisions. Also explains the importance of capital costs and the decision affects the comparison between the various processes and how.

A) Investment Appraisal should add value to the business entity. Do u agree?

Yes, I strongly with this logic because the assessment of investment added value to business or entity a method of financial assessment of investment restrictions, non-economic factors to understand. The total benefits of the project to assess their contribution to organizational strategy may be, their financial contributions or other means using the index for non-financial benefits.

 "Shows that many organizations strategic investment decisions. Investment decisions on the economic vitality and competitiveness of their assessment of the impact, should the couple's equipment financing strategy”.

PROJECT ANALYSIS, PAYBACK, NPV, IRR

B) Calculate each project payback period, NPV and IRR......

YEARS

PROJECT A

£000

PROJECT B

£000

0

(10)

(25)

1

3

6.5

2

3

7

3

3

7.5

4

3

7.5

5

3

8

These two projects, five (5) year period are based investments. An initial investment project A of five years is £10,000 for an equivalent cash flow of £ 3,000.00. During the five year period where the initial investment project B £25000.00 pounds and cash flow is variable. The only Guess used here, the cost of capital is 12.5%.

Payback:

PROJECT A:-

Formula

Payback period = Investment required / Net annual cash inflow

Project A payback period = 10 / 3

= 3.33

Project B:

Project data as B is not equal to the flow period of 5 years; we calculate the cumulative discounted cash flow return on the basis of:

Project ‘A’

Year

Net Cash Flow

Discount

Factor

Present Value

Cumulative Discounted Cash Flow

00

(25)

1

(25)

(25)

01

6.5

.889

5.78

(19.22)

02

7

.790

5.53

(13.69)

03

7.5

.702

5.27

(8.42)

04

7.5

.624

4.68

(3.74)

05

8

.555

4.44

0.7

Total Present Value

25.7

Pay back for project “A” is =3.33years.

Pay back for project “B” after 4yrs+ (3.74/4.44)=4.842 years.

NPV (Net present value):

Project A:

If a project's net cash equalled about 5 years, we gain is used to calculate net present value factor.

5 annuity capital cost of 12.5% (.889 + .790 + .702 + .624 + .555) = 3.56 based on factors.

Net Present Value Calculation Formula = Total Present Value – Initial Investment

Net Present Value for Project ‘A’ = (Cash flow X annuity factor) – Initial Investment

= (3X3.56) – 10

= 0.68

Project B:

Net Present Value Calculation Formula = Total Present Value – Initial Investment

Net Present Value for project ‘B’ = Total Present Value – Initial Investment

= 25.7 – 25

= .70

Internal rate of return (IRR):

Project A:-

Assume cost of capital for project ‘A’ is 17%

Net Present Value for project A will be = (3*3.119)-10=9.357-10= (0.643)

IRR = positive rate + {(positive NPV/ (positive NPV+Negative NPV))*range of rates}

=12.5 %+{( .68/(.68+.64))*(17%-12.5%)}

= 12.5 %+{ .515*4.5%}

= 12.5%+3.12%

=15.12%

The internal rate of return of project A is 15.2%

Project B:

For calculating the internal rate of return for project B a negative Net present value is required so assume the cost of capital for the project is 18%

Project ‘B’

Net Cash Flow

Discount Factor

Present Value

(25)

1

(25)

6.5

.893

5.48

7

.712

4.98

7.5

.600

4.5

7.5

.507

3.80

8

.428

3.42

Total Present Value

22.18

Less Initial Investment

(25.00)

NPV

(2.82)

IRR = positive rate + {(positive NPV/ (positive NPV+Negative NPV))*range of rates}

=12.5 %+{( .70/(.70+2.82))*(18.5%-12.5%)}

=12.5 %+{ .198*6%}

=12.5%+1.18%

=13.68%

The internal rate of return for project B is 13.68%

DECISION MAKING:

C) For each of the above methods which project should be selected and explain why?

1) By using payback method the decision is to select project “A” because: Assessment through calculation of payback, NPV analysis and IRR calculations, "Project A" to return to more quickly return the initial investment. Return count up, "Project B" 4.85 will be repaid by year's end and "Project A" will be 3.33 years for reimbursement for investments according to investment. A project as' a long time sending back the initial investment, At present think about how fast your investments' Project A 'should be selected.

2) By using NPV method the decision is to select project “B”because: However, using net present value, will take the time value of money and discounted cash flow method right "concept, the project committee" will be more profitable B 'Company' Physical Details: At present £ 10,000.00 for the investment company must "£ 3.000 in cash equal to five years", and received less than 12.5%. Therefore, 'A Plan' Present has a net present value of £ 680. However, the project company £ 25,000 of B £ 6500 in cash, 70 million pounds, investment £ 7.500, £ 8,000, or 7.500 over 12.5%. Therefore, the project's net present value of 700 pounds. Therefore, if the "real budget, At Present", all other conditions are favourable, the project is B 'is a better investment.

3) By using IRR method the decision is to select project “A” because: On the other hand, it is 15.9% higher IRR project A "return IRR is calculated. This means that if the company more margin than they 'project A ‘rather than looking to choose B.

DISCOUNT CASH FLOW:

D) Explain why it is essential that discount cash flow should be calculated when making long term investment decision?

Decisions without calculating the true value and yield is very common, but the records for these problems are close to a big help.  If we "follow the evaluation of an investment project for B ', discounted cash flow method that made the picture without using" Always At present "exemption from the different discount factor than the more accurate data and returns a much return than the estimated figure for the period gives us. NPV and IRR methods and project cash flows discounted back using the most appropriate assessment.

E) What would happen to the NPV if:

1) The cost of capital increased?

Increase the cost of capital is the company to higher borrowing costs or high investment. If we follow clearly see the cost of capital return multiple values in investment rate and the period can be summed up both positive and negative net present value, which makes it more difficult decision.

2) The cost of capital decreased?

However, the value of the investment means lower costs, lower capital costs improve efficiency and better. Net present value of the low cost of capital and internal rate of return is always a higher value, which means that it produces a better return on the value of investment has always been.

F) Explain why the NPV of a relatively long term project is more sensitive to changes in the cost of capital than is the NPV of a short term project?

NPV is the most effective way to measure the right investment. As the couples involved in the project net present value and output filter, this is a very desirable long-term decisions. It produces a single result for each year a regular basis, and creates a more clear understanding of what is the country's investment or investment value, especially this year.

G) How does a change in the cost of capital affect the project’s IRR?

In order to understand the cost of capital, if we look at clarify and change the cost of capital changes and not the net present value internal rate of return. Cost of capital internal rate of return and no direct effect.

H) Compare the effectiveness of the NPV method with that of the IRR method?

NPV value of a dollar today than the same dollar in the future, is worth adjusted for inflation and taking into account efficiency. If a project idea that you positive NPV, should be upheld. However, if NPV is negative, perhaps the project would be rejected because they would generate negative cash.

IRR is the discount rate net present value of all cash flows equal to zero on the project has a special. You expected to generate IRR of the project as the growth rate might think. IRR strong growth better than expected.

REFERENCES:-

Weston, j of Fred (2001) Financial and accounting non-financial manager: McGraw-Hill Professional, United States, page 220.

Dyson (2001), accounting for the fifth edition of non-accounting students. : Person Education Limited, Essex, UK PP - 397

Emmanuel, C. and Harris, E., and and Komakech, the first (2009), management judgments and strategic investment decision-making: Executive Summary Series, No. 4, CIMA.

Dyson (2001), accounting for the fifth edition of non-accounting students. : Person Education Limited, Essex, UK PP - 409.

Weston, j of Fred (2001), financial and accounting non-financial manager: McGraw-Hill Professional, USA. p269.

CT Horngren to bhimani, management and cost accounting, 2004, p. 343

Gotze, the United States and Norchoctt, D. and Schuster, the first (2008), investment appraisal: methods and models, Springer, large Bretain. P13's

Classes, strong (1999), accounting and financial management: management accounting, Kogan Co., Ltd., U.S. PP 86-88.

Vinten, Gerald (ed.) (2004), to achieve management control, Emerald Group Publishing Limited, United Kingdom. PP 493.

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