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¶ … Net Present Value (NPV) decision rule. Describe how is the NPV rule is related to a cost-benefit analysis, and how is it related to the Valuation Principle.
The Net Present Value decision rule basically states that an investment should be accepted if its net present value is greater than zero, but otherwise rejected. The NPV of an investment is the present value of its cash inflow minus the present value of its cash inflow. One may compute NPV by identifying all cash flows, determining and applying the discount rate, and summing all of the present values. The valuation principle looks at earnings, revenues, cash flow, equity, dividends, and subscribers in order to determine the value of company. This whole value is then divided by the number of shares in a company, to determine a per-share value.
Explain the implication the Law of One Price has for the price of a financial...
Provide examples.
The Law of One Price is a theory that the price of a given item will have the same price when exchange rates are taken into consideration. This is particularly salient when the item is a security, commodity, or other traded asset. When the Law of One Price is not in existence, then there can be different prices in different arguments. Therefore, an arbitrageur can purchase in the cheaper market and sell in the higher market, to make a profit. Therefore, when there is no one price, and therefore no purchasing power parity, people can profit from arbitrage until the prices converge.
3 Discuss the importance of the Time Value of Money concept, and why cash flow in the future is worth less than the same amount today.
The Time Value of Money, also referred to as the present discounted value, is a concept that suggests that money…
Works Cited
Investopedia. 2011. Perpetuity. Retrieved from:
http://www.investopedia.com/terms/p/perpetuity.asp
Investopedia. 2011. Present value of an annuity. Retrieved from:
http://www.investopedia.com/terms/p/present-value-annuity.asp
Cardinal Health The first project is for Micron Technology. The net present value analysis will be used to evaluate this project. The net present value (NPV) technique involves discounting future cash flows to present dollars, to take into account the firm's opportunity cost of capital. As a basic rule, projects that have a positive net present value will add value to the company above and beyond existing operations. All such projects
pay back period" is the length of time that is required to cover the cost of an investment. I would use this in order to make a good financial decision. The calculation that I would do is as follows: "http://i.investopedia.com/inv/dictionary/terms/paybackperiod.gif" d? For instance, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or, in other words, $20 per 5 years. The better
Its three-year payback is $16,000. The three-year payback for project B. is -$2,000, so that project should not be accepted. 5) The most commonly used capital budgeting procedures are the net present value (NPV) and the internal rate of return (IRR). After this comes payback period, although that is significantly less popular on account of its inability to account for the time value of money. 6) Although net present value (NPV)
Thus, cash savings of equal dollar amounts will have a higher present value in year one and a lower present value in year five. For the first option, the net present value calculation is as follows: Option 1 Year 0 1 2 3 4 5 Cost $ (350,000) Savings $92,000 $92,000 $92,000 $92,000 $92,000 PV $ (350,000) $82,143 $73,342 $65,484 $58,468 $52,203 Project NPV $ (18,361) This calculation therefore indicates that the net present value of option 1 is -$18,361. That is, the option does not have a negative net present value. A basic rule of
(Economou and Trichias, 2009) Remuneration is stated to be as follows for each of these actors: (1) real estate brokers -- Commission based on percentage of the transaction value; (2) lawyers -- Commission based on percentage of the transaction value; (3) Notaries -- Commission base don percentage of the transaction value; (4) Civil Engineers -- According to specific regulations, taking into account elements of the property in question; and (5) Constructors -- percentage of
In contrast, within the firm, the entrepreneur directs production and coordinates without intervention of a price mechanism; but, if production is regulated by price movements, production could be carried on without any organization at all, well might we ask, why is there any organization?" (Coase, 1937, p. 387) In simpler words if markets are so efficient why do firms exist? Coase explains, "the operation of a market costs something