Basic Senior Year Financial Questions Assignment - 1

Basic Senior Year Financial Questions - Assignment Example Net present value recognizes time value of money and such appreciates that a shilling now is more valuable than a shilling tomorrow and the two can only be compared if they are at their present value. This is another modern method of discounting cash flow because the technique uses the principle of NPV. It is defined as the rate which the present value of cash outflows of an investment equates the initial capital invested. IRR will accept a venture if its IRR is higher than or equal to the minimum required rate of return which is usually the cost of finance also known as the cut off rate or hurdle rate, and in this case IRR will be the highest rate of interest a firm would be ready to pay to finance a project using borrowed funds and without being financially worse off by paying back the loan (the principal and accrued interest) out of the cash flows generated by that project. Thus, IRR is the break-even rate of borrowing from commercial banks. This method gauges the viability of a venture by taking the inflows and outflows over time to ascertain how soon a venture can payback and for this reason PBP (or payout period or payoff) is that period of time or duration it will take an investment venture to generate sufficient cash inflows to payback the cost of such investment. This is a popular approach among the traditional financial managers because it helps them ascertain the time it will take to recoup in form of cash from operations the original cost of the venture. This method is usually an important preliminary screening stage of the viability of the venture and it may yield clues to profitability although in principle it will measure how fast a venture may payback rather than how much a venture will generate in profits and yet the main objectives of an investment is not to recoup the original cost but also to earn a profit for the owners or