Portfolio Risk and Return – Managing Portfolio in the Light of Returns and Constraints The objectives associated with the returns are divided in to several different needs a few of which may include the following: Capital Preservation Preservations means to maintain a certain level, so capital preservation calls for maintaining a certain level of capital… Read More »
Portfolio Risk and Reward Investment is always associated with two most important things namely, risks and returns and measuring both of these is always a crucial part of every investment. When it comes to the measurement of the risks and returns you may come across a number of measurement techniques of which Standard Deviation takes… Read More »
What is Time Value of Money? Time Value of Money – A Crucial Concept Time value of money is the name which we all hear every now and then in almost all the fields. No matter you talk about investing your money somewhere, saving your money at home, initiating new projects or buying and selling… Read More »
IRR Decision Rule IRR is one among a number of capital budgeting techniques which is most commonly used by the investors for evaluating their investment decisions. What is IRR? IRR is the discount rate on which NPV of a project becomes Zero OR we can define IRR as the discount rate at which Present Value… Read More »
NPV Decision Rules – Capital Budgeting Techniques Net Present Value is defined as the present value of all expected cash flows generated by the project minus present value of the cost of the project. Net Present Value = Present value of all expected cash inflows – Present value of the cost of the project
Project Analysis – Capital Budgeting Techniques Nile’s Manufacturing is considering buying automated machinery that costs $250,000. Working capital requirement is $25,000 and they are expecting Annual cash savings of $103,000 for 5 years. The company uses straight-line depreciation method. The salvage value the machinery at the end of year 5 is expected to be… Read More »
Project Analysis – Capital Budgeting Techniques Solved example of Payback Period and ARR Steve has been appointed as finance director of a company. His only aim is to gain some experience before moving to a larger company. His intention is to work here for three years and when he would leave the company; its share price… Read More »
Project Analysis – Capital Budgeting Techniques Net Present Value Example We are considering following project for investment purpose. Initial cost of the project: $800,000 Project Life: 5 years Annual Net Operation Profit:… 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 »
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 »
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 »
Profitability Index Profitability index (PI) is the ratio of investment to pay off a suggested project. It is a useful capital budgeting technique for grading projects because it measures the value created per unit of investment made by the investor. This technique is also known as Profit Investment Ratio (PIR), Benefit-Cost Ratio and Value Investment… Read More »
Capital Budgeting Process Capital Budgeting Process is a process of identifying and evaluating projects where businesses are expected to receive cash flows over a period longer than one year. Any corporate capital budgeting decisions that can affect future earnings can be evaluated using this framework. Examples of Capital Budgeting Decisions: For example, decisions about whether to… Read More »
How to Calculate Net Present Value using Excel? The calculation of net present value is used when a business has to identify a viable investment opportunity. There are many ways to calculate the NPV. The simplest way is: By Use of NPV function in Excel: The NPV function consists of the following arguments: =NPV (Rate, FCF… Read More »