Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
¶ … discount rate at which the line intersects the curve is 18%. This tells us that if the discount rate for the project is higher than 18%, the project will not have a positive net present value. If the discount rate for the project is lower than 18%, the project will have a positive net present value.
The project's IRR is 9%.
The NPV at the following discount rates is:
$126,000
$64,642.69
$10,906.87
($36,414.90)
The discount rate at which the line intersects the horizontal axis is 9%.
Between NPV and IRR, the former is the best way to make capital budgeting decisions. Because the two methods are virtually identical -- and based on the same math -- there is little to choose between them. Both numbers are arrived at by discounting back future cash flows. The difference is lies in the way the number is rendered. Internal rate of return is focused on the rate of return, whereas net present value is focused on the total amount of the cash flows.
One of the main reasons for making capital budgeting decisions is so that management can make the best investments of the firm's money. Often, the decision will come from a set of alternatives in which there is at least some mutual exclusivity. Thus, the decision-making criteria need to take into account the size of the investment in addition to its payoff. The internal rate of return is useful in helping to identify those investment opportunities that have the highest percentage payoff, but if a small investment opportunity is mutually exclusive with a larger opportunity that is more lucrative in real dollars but less lucrative on a percentage basis, the company may choose the smaller alternative. Under this scenario, the profit of the company would not be maximized.
Because net present value accounts not only for the percentage return but also the raw dollar figures involved, it provides management with more useful information upon which to base their capital budgeting decisions. Internal rate of return is a strong method, but it is limited because it only addresses one component of the capital budgeting decision. Net present value, therefore, is more complete and thus is the better of the two methods for capital budgeting decision making.
NPV vs. IRR Discount rate 0%, NPV =$670,000 Discount rate 2%, NPV=$614,400 Discount rate 6%, NPV=$514,820 Discount rate 11% NPV= $409,000 Capital Cost 5%, Modified IRR= 45.6% Upon plotting these points on a chart an obvious relationship is modeled. The lower the discount rate the higher the NPV appears to manifest. The curve crosses the x axis at a discount rate of .03%. Rate at 1%, NPV=$65,358 Rate at 4%, NPV= $7,593 Rate at 10%, NPV= -$91,776 Rate at 18%,
Capital Budgeting If the discount rate is 0%, the project's NPV is $670,000. If the discount rate is 2%, the project's NPV is $614,353.50. If the discount rate is 6%, the project's NPV is $514,815.60. If the discount rate is 11%, the project's NPV is $408,997.50. The project's modified internal rate of return is 39%. The chart will show that the net present value is zero will at 46%, as this
FEDs and MoneyAre CCs and Debit Cards Money?Credit cards and debit cards are not money but are actually considered tools or financial instruments that facilitate transactions in which money is exchanged. Both types of cards represent a convenient way to access and spend funds in a bank account (or made available to one via a line of credit). Because they are accessing different types of accounts, they act differently (Chand,
8 for August, 2008, the most recent available (next release is October 20th). This represents a decline over the previous month, and the lowest level of the year. Over the past three months, this index has trended down. In June this was at 102.0, then 101.3 in July. Prior to that the level it had been stable all year (either 101.9 or 102.0). In terms of individual components, the following components
Federal Funds Rate The federal fund rate was part of the solution, comprised in the Federal Reserve Act of 1913, to centralize the banking system and gain public control of the money supply, inflation, and economic growth. The banking crisis of 1907 was a result of decentralized, unregulated banking that caused confusion with private bank notes being used as currency. There were occasional episodes of monetary mismanagement where the money supply
In essence, the likelihood of profitability is a longer-term gamble with Acme Consulting than it would be with the Interstate Travel Center, but the upfront risk is lessened by the experience, lower startup costs, and more diverse sources of startup funding that Acme Consulting plans to employ. These are the reasons that the risks associated with this firm are medium instead of high, and the discount rate should reflect this