Why people invest in stocks? Investors buy, hold and sell financial assets to earn returns on them. Within the spectrum of financial assets, why do some people buy common stocks instead of safely depositing their money in an insured saving account with a guaranteed minimum return? Describe the factors/characteristics that investors keep in consideration while preferring… Read More »
Discounted Cash Flows – Capital Budgeting Techniques We have discussed earlier that accounting rate of return & payback period ignores time value of money and cash flow trends. Means cash inflow of $5000 in the first year and $50 in the fifth year is just as good as $50 in the first year and $5000… Read More »
Accounting Rate of Return – Capital Budgeting Techniques Accounting rate of return is the project evaluation technique which differs from other capital budgeting techniques because the focus of this technique is average annual net income or accounting income rather than cash flows. ARR is defined as the ratio of average accounting income to average investment. You will find… Read More »
Annuity Due and Ordinary Annuity – Capital Budgeting Techniques We often encounter situations where we have multiple cash flows of same amount. A very common example of such cash flows is loan repayment plan where borrower is asked to repay the loan by making equal installments over some period of time. Almost all home mortgages, car… Read More »
How to Calculate Net Present Value For example we are planning of starting a business of producing and selling pesticides. We can estimate the initial cost with reasonable accuracy because we know what we will need to buy to begin production. Would this be a good investment? It depends, whether its value exceeds its initial cost or… Read More »
How to Calculate Discounted Payback Period For calculating discounted payback period (DPP), we will calculate the present value (PV) of each cash flow (CF) starting from the first year as zero point. For said purpose, the management is required to set a suitable discount rate. The discounted cash flow (DCF) for each period is to… Read More »
How to Calculate Payback Period-Capital Budgeting Techniques Payback period is calculated by capital invested in the project by the net annual cash flow. Average of net annual cash flows may be used if net annual cash flows are not expected to be the same. Payback Period= Initial Investment/Average Annual Cash Flows
Independent and Mutually Exclusive Projects Understanding of classification of capital budgeting projects plays a crucial role while analyzing viability of projects. What is mutually Independent Projects? A Project whose cash flows have no impact on the acceptance or rejection of other projects is termed as Independent Project (not mutually exclusive). Thus, all such Projects which meet… Read More »
Internal Rate Of Return And Mutually Exclusive Projects……. What’s the Concern? While considering the mutually exclusive projects, IRR technique can be misleading. Investment projects are said to be mutually exclusive if only one project could be accepted and others would have to be rejected. NPV and IRR methods for project evaluation leads to conflicting results… Read More »
Capital Structure and Cash Flows On one hand, operations of the company may help in forecasting of future cash flows but in addition to this, future cash inflows and outflows can also be accessed through company capital structure. A corporation may use different combinations of equity, debt, or mixture of securities to finance its assets… Read More »