The Logic and Practice of Financial Management, Essay Example

As an investor you will always be asking yourself this question. How much will a single payment accumulate to at a later time? The future periodic payments compare to the present value or discounted value in that, a discounting factor is applied to this future payment in order to know the time value of money in the current period. This single payment acts like our present value and therefore getting the accumulation value by applying the appropriate interest rate and duration of investment will enable the investor calculate the amount of installments/future periodic payment to make.

Internal Rate of Return

Internal rate of return is used in budgeting capital in order to make all NPVs of all the cash flows in a given project to be zero. The internal rate of return is fundamentally the discount rate that is employed in the capital budgeting so as to rank different investment opportunities in terms of the desirability (Keown, Martin and Petty). This comparison is founded on assumptions that are held across the board.

Net Present Value (NPV)

Net Present Value refers to the difference between the present cash flow and out flows in the business. It brings a comparison of the value of the dollar at the present and in the future. NPV plays a very crucial role as it’s considered in making decision concerning investment whether valuable or invaluable (Hirschey and Bentzen). It is obtained by getting the difference between the present value of all the incomes expected from the project and the initial value of the investment. It gives the position of the project, relative to the expected rate of return that is the discounting rate.

Risk analysis is an important factor to consider when analyzing an investment’s cash flows. Risk analysis allows an investor to account for period when the market would not respond as expected to the product in question, therefore taking into consideration all the aspects of the business cycle (Samuelson and Marks). A failure to account for this factor leads to the generation of undesirable or unexpected cash flows that may affect the integrity and success of a project.

Works Cited

Graham, John R and Scott B Smart. Introduction to corporate finance. Mason: South-Western Cengage Learning, 2012. Print.

Hirschey, Mark and Eric Bentzen. Managerial economics. Andover: Cengage Learning, 2014. Print.

Keown, Arthur J, John D Martin and William J Petty. Foundations of finance : The logic and practice of financial management. Harlow: Pearson Education, 2014. Print.

Samuelson, William and Stephen G Marks. Managerial economics. Hoboken: John Wiley & Sons, Inc., 2014. Print.