Discussion 4 - NPV & IRR
docx
keyboard_arrow_up
School
University of Maryland Global Campus (UMGC) *
*We aren’t endorsed by this school
Course
610
Subject
Finance
Date
Feb 20, 2024
Type
docx
Pages
1
Uploaded by MajorMoleMaster406
1.
Should IRR and NPV be calculated to include the Interest expense on loans used to finance the investment when operating cash flow is negative?
Yes, IRR and NPV should be calculated to include the interest expense on loans used to finance the investment when operating cash flow is negative. IRR and NPV are commonly used to analyze investment returns and commonly, the advertised return assumes that interest payments are reinvested back into the investment (Fernando, 2021).
2.
Explain what makes NPV the best criterion to measure the value creation of an investment.
Net present value is such a valuable tool because it takes into account the notion that a dollar today is worth less than a dollar in the future, also known as the time value of money (Fernando, 2021). It is used to analyze the profitability of an investment and can be used to compare alternative investments against one another. A positive NPV indicates that an investment will be profitable (i.e. the investment is projected to earn more than it will cost even when considering inflation). 3.
Is there a change in working capital created by an investment?
Working capital is defined as a company’s current assets minus a company’s current liabilities (Fernando, 2021). A change in working capital is seen when the net working capital from one accounting period differs from the next (Accounting Tools, 2021). Investments that are intended to be sold within a year are considered current assets (Kennon, 2021) and therefore would create a change in working capital. Long-term investments that are intended to be held for more than a year, on the other hand, are considered non-current assets (Kennon, 2021) and therefore would not create a change in working capital. Accounting Tools. (2021). What causes a change in working capital?
https://www.accountingtools.com/articles/what-causes-a-change-in-working-capital.html
Fernando, J. (2021). Internal Rate of Return (IRR).
Investopedia.
https://www.investopedia.com/terms/i/irr.asp#:~:text=The%20internal%20rate%20of%20return,a
%20discounted%20cash%20flow%20analysis.&text=It%20is%20the%20annual%20return%20that
%20makes%20the%20NPV%20equal%20to%20zero
.
Fernando, J. (2021). Net Present Value (NPV).
Investopedia. https://www.investopedia.com/terms/n/npv.asp
Fernando, J. (2021). Working Capital
. Investopedia. https://www.investopedia.com/terms/w/workingcapital.asp#:~:text=Working%20capital%2C%20also
%20known%20as,as%20accounts%20payable%20and%20debts
.
Kennon, J. (2021). Long-Term Investment Assets on the Balance Sheet.
The Balance. https://www.thebalance.com/long-term-investments-on-the-balance-sheet-
357283#:~:text=Investments%20are%20seen%20as%20current,for%20more%20than%20a%20year
.
Discover more documents: Sign up today!
Unlock a world of knowledge! Explore tailored content for a richer learning experience. Here's what you'll get:
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Documents
Related Questions
Consider the following statement: "The estimation of the Free Cash Flow to the Firm (FCF) considers investment decisions but ignores financing decisions." Is this statement true or false? Explain your answer.
arrow_forward
Which of the following is not an advantage of the average rate of return method?
a.includes the amount of income earned over the entire life of the proposal
b.takes into consideration the time value of money
c.emphasizes accounting income
d.easy to use
arrow_forward
Provide correct solution!
What does ROI stand for in finance?
A) Return on InvestmentB) Revenue on InvestmentC) Rate of InterestD) Risk of Investment
arrow_forward
A centerpiece of any study of finance is "valuation." A simple function, "V=l/R," can be used to
describe an asset's "value." What does the "R" in that expression stand for?
O a future cash flow
O a current cash flow
O a market-determined discount rate
O a variable income measure
O a measure of probability
arrow_forward
A primary strength of the net present value method for analyzing investments is that it accounts for the amount and timing of earnings for that investment.
A. True
B. False
arrow_forward
Which of the following is an advantage of the average accounting return (AAR)?
Multiple choice question.
It is based on cash flows and market value.
It accounts for the time value of money.
Its input data are easily available.
It uses an arbitrary benchmark cutoff rate.
arrow_forward
The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
O C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
O D. No comparison can be made-we need to know the cash flows to calculate the present value.
arrow_forward
What does ROI stand for in finance?
A) Return on InvestmentB) Revenue on InvestmentC) Rate of InterestD) Risk of Investment need answer!
arrow_forward
In the most general sense, which of the following
would you expect to be true?
Select one:
a. If a current asset account and a current
liability account both increase by the same
amount, there is a net use of funds.
b. If the common stock outstanding increases
there is a use of funds.
c. If a liability account increases and an asset
account decreases by the same amount, there is
a net source of funds.
d. If fixed assets decrease by the amount of
depreciation for the year, there is a net use of
funds.
e. Changes in income and expense accounts
do not affect sources and uses of funds.
arrow_forward
The most accurate way to analyze the profitability of an investment is to compute the payback period.
A. True
B. False
arrow_forward
What is the definition of “opportunity cost” as it relates to the time value of money?
It is the loss of a potential gain choosing one alternative over another, particularly ignoring the time value of money.
It is the benefit side of the cost/benefit ratio.
It is the price of selling an asset.
It is the amount of money invested in saving bonds.
exoplain your answer give correct answer
arrow_forward
Profitability index. It is a ratio that provides information about the present value of net cash flows to the net investment. It provides a measure of the relative present value return for each dollar of initial investment. Discuss its usefulness. Should managers rely upon it? Consider its usefulness in a capital rationing situation (capital investment under conditions of financial restraint).
arrow_forward
Which of the following decision criteria is the easiest to use and very popular among investors?
O Payback period.
O Internal rate of return.
O Average accounting return.
Net present value.
O Discounted return on investment.
arrow_forward
Which method does not consider the time value of money? Choose the correct.
A.
Net present value
B.
Internal Rate of Return
C.
Average rate of return
D.
Profitability Index
arrow_forward
The value of an investment can be defined in numerous ways. Which is FALSE?
a. It is the value determined by demand and supply.
b. It is an objective estimate wherein the risk preference of the investor is considered.
c. It is the present value of the cashflows on the investment
d. It is dependent on the perceptions of the investor.
arrow_forward
Which of the following statements are true regarding the payback period of an investment?
It does not account for the time value of money
No objective criteria exists for what is an acceptable payback period
Cash flows occurring after the payback period have no impact on the payback computation
All of the above
arrow_forward
The payback method measures:
The profitability of an investment.
The net cash inflow from an investment.
The economic life of an investment.
How rapidly the investment is recovered.
The investment’s true rate of return.
arrow_forward
Answer following questions:1.- What should an investor recognize if required rate on his fixed income investments, whose business model is to do branding, increases significantly?2.- What is understood by bringing values of an investment to “AMORTIZED COST”?
arrow_forward
What does ROI stand for in finance?
A) Return on InvestmentB) Revenue on InvestmentC) Rate of InterestD) Risk of Investmentneed exp
arrow_forward
Which of the following statements describing the elements of intrinsic valuation is most accurate?
A.) When the present value of the cashflows is discounted with the appropriate rate and this present value is positive, then the asset providing these cashflows has a value to the investor.
B.) The risk-free rate is the lowest rate that an investor can earn from short-term investments.
C.) Cashflows may include depreciation expenses and amortization costs.
D.) A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best.
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Related Questions
- Consider the following statement: "The estimation of the Free Cash Flow to the Firm (FCF) considers investment decisions but ignores financing decisions." Is this statement true or false? Explain your answer.arrow_forwardWhich of the following is not an advantage of the average rate of return method? a.includes the amount of income earned over the entire life of the proposal b.takes into consideration the time value of money c.emphasizes accounting income d.easy to usearrow_forwardProvide correct solution! What does ROI stand for in finance? A) Return on InvestmentB) Revenue on InvestmentC) Rate of InterestD) Risk of Investmentarrow_forward
- A centerpiece of any study of finance is "valuation." A simple function, "V=l/R," can be used to describe an asset's "value." What does the "R" in that expression stand for? O a future cash flow O a current cash flow O a market-determined discount rate O a variable income measure O a measure of probabilityarrow_forwardA primary strength of the net present value method for analyzing investments is that it accounts for the amount and timing of earnings for that investment. A. True B. Falsearrow_forwardWhich of the following is an advantage of the average accounting return (AAR)? Multiple choice question. It is based on cash flows and market value. It accounts for the time value of money. Its input data are easily available. It uses an arbitrary benchmark cutoff rate.arrow_forward
- The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. O C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. O D. No comparison can be made-we need to know the cash flows to calculate the present value.arrow_forwardWhat does ROI stand for in finance? A) Return on InvestmentB) Revenue on InvestmentC) Rate of InterestD) Risk of Investment need answer!arrow_forwardIn the most general sense, which of the following would you expect to be true? Select one: a. If a current asset account and a current liability account both increase by the same amount, there is a net use of funds. b. If the common stock outstanding increases there is a use of funds. c. If a liability account increases and an asset account decreases by the same amount, there is a net source of funds. d. If fixed assets decrease by the amount of depreciation for the year, there is a net use of funds. e. Changes in income and expense accounts do not affect sources and uses of funds.arrow_forward
- The most accurate way to analyze the profitability of an investment is to compute the payback period. A. True B. Falsearrow_forwardWhat is the definition of “opportunity cost” as it relates to the time value of money? It is the loss of a potential gain choosing one alternative over another, particularly ignoring the time value of money. It is the benefit side of the cost/benefit ratio. It is the price of selling an asset. It is the amount of money invested in saving bonds. exoplain your answer give correct answerarrow_forwardProfitability index. It is a ratio that provides information about the present value of net cash flows to the net investment. It provides a measure of the relative present value return for each dollar of initial investment. Discuss its usefulness. Should managers rely upon it? Consider its usefulness in a capital rationing situation (capital investment under conditions of financial restraint).arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College