The importance of investment appraisal

The importance of investment appraisal Investment appraisal helps the investors or the financial institutes to identify the attractiveness of any investment proposal among different available methods, for instance IRR (Internal Rate of Return), NPV (Net Present Value), Payback period etc. Investment Appraisal is a fundamental body of Capital Budgeting which is also applicable in the areas where the return may not be quantifiable. Investment Appraisal is important as because it shows the investors to calculate the outcome of the investment. Furthermore, with the help of Investment Appraisal the investors can easily identify the best or most profitable option among the available alternatives. (Investment Appraisal, [n.d.]). (b) What is the payback period of each project? If AP Ltd imposes a 3 year maximum payback period which of these projects should be accepted? The payback period is the time frame required to recover the invested amount. In the case of the cash flows with an annuity (same amount in each year), then payback period can be easily calculated by dividing the cost by the annual cash flow. Otherwise we subtract the cash flows from the cost until the remainder is zero. For any sort of investment firms prefer short payback period as the investment can be used somewhere else. Generally, firms maintain some maximum allowable payback period against which all investments are compared. It is a popular method as is quick and easy to calculate and importantly it gives a measure of the liquidity of the project. (Timothy R. Mayes, [n.d.]) Payback Period for Project A: Year Cash Flow Cumulative Cash Flow 1 38 38 2 42 80 3 48 128 4 50 178 5 70 248 The payback period for Project A= 2+ (115000-80000)/48000= 2+ 0.73= 2.73 years Payback Period for Project B: As this is a constant stream of cash flow, the payback period for Project B = 115000/43000= 2.67 years Both the projects can be accepted, If AP Ltd imposes a 3 year maximum payback. But between these two projects, B will be preferred over A. (c) What are the problems of the payback period? Though the payback method provides real usefulness by providing information on how long funds will be engaged in the project it suffers from two primary problems: Payback Period does not consider the time value of money: In this calculation, Cash Flows are simply added without discounting. This violates the most basic principle of financial analysis which stipulates that cash flows occurring at different points can be considered only after suitable compounding/ discounting. (V S RAMA RAO, 2008) This measure does not consider a projects profitability. It is just a measure of a projects capital recovery. Though it measures a projects liquidity, it does not indicate the liquidity position of the firm as a whole. (V S RAMA RAO, 2008) The payback period method leads to ignore projects generating substantial cash inflows in later years. (Sarma, Deepak, nd) (d) Determine the NPV for each of these projects? Should they be accepted explain why? Project A: Year Cash Flow Discount Factor Net Present Value 1 38000 0.896860987 34080.72 2 42000 0.804359629 33783.10 3 48000 0.721398771 34627.14 4 50000 0.646994413 32349.72 5 70000 0.580264048 40618.48 Total 175459.16 So, Profit = Total Inflow- Initial Investment = 175,459.16-115,000.00 = 60459.17 As the NPV of Project A seems a profitable one (Projects NPV is bigger than the Initial Investment) it can be accepted. Project B: Year Cash Flow Discount Factor Net Present Value 1 43000 0.896860987 38565.02 2 43000 0.804359629 34587.46 3 43000 0.721398771 31020.14 4 43000 0.646994413 27820.75 5 43000 0.580264048 24951.35 Total 156944.74 So, Profit = Total Inflow- Initial Investment = 156944.74- 115000 = 41944.74 As the NPV of Project B seems a profitable one (Projects NPV is bigger than the Initial Investment), it can be accepted. (e) Describe the logic behind the NPV approach. The net present value (NPV) is the difference between the present value of the cash flows (the benefit) and the cost of the investment (IO): In other words, this is the projected increase in wealth that the shareholders will receive out of any accepted project. All projects with NPV greater than or equal to zero should be accepted. A project with positive Net Present Value means the IRR is greater than the Weighted Average Cost of Capital (WACC). NPV, Net Present Value, allows you to value a companys assets at their correct current value when the accounts are prepared. The calculation of NPV takes into account the assets original cost, less all accumulated depreciation allowed against that asset in previous tax computations. The NPV method is based on a logical approach. An NPV of zero signifies that the projects cash flows are exactly sufficient to repay the invested capital and to provide the required rate of return on that capital. If NPV > 0, then the project is generating a larger amount of cash that required to service debt and to allow a return to shareholders. So if the firm takes on projects that have positive net present values (NPV) then the wealth of shareholders will increase, enticing them to increase their investment in the firm. The NPV method of capital budgeting dictates that all independent projects that have positive NPV should accepted. The rationale that is behind that assertion arises from the idea that all such projects add wealth, and that should be the overall goal of the manager in all respects. If strictly using the NPV method to evaluate two mutually exclusive projects, you would want to accept the project that adds the most value (i.e. the project with the higher NPV). Net present value is defined as a way to improve the effectiveness of project evaluations through the use of discounted cash flow techniques. To find the present value of a project, you must first find the present value of each cash flow discounted at the cost of capital. Then, sum the discounted cash flows. If the NPV is positive, accept the project. If NPV is negative, reject the project. It is important to remember that if two projects are mutually exclusive, the project that has the higher NPV should be selected. Net present value is defined as a way to improve the effectiveness of project evaluations through the use of discounted cash flow techniques. To find the present value of a project, you must first find the present value of each cash flow discounted at the cost of capital. Then, sum the discounted cash flows. If the NPV is positive, accept the project. If NPV is negative, reject the project. It is important to remember that if two projects are mutually exclusive, the project that has the higher NPV should be selected (f) Discuss the relationship between NPV and cost of capital. NPV has a direct impact on the capital budgeting decision. These two factors are directly inter-related. NPV NPV = 0 implies IRR = Cost of Capital: Provides the minimum return. Probably reject from the cash flow perspective. Others factors could be important. NPV > 0 implies IRR > Cost of Capital: Screen in for further analysis. Other investments may provide better returns and capital should be rationed, i.e., go to the most profitable projects. Others factors could be important. (g) Calculate the IRR for each project. Should they be accepted? IRR of Project A: NPV at 25% Year Cash Flow Discount Factor NPV 1 38 0.8 30.4 2 42 0.64 26.88 3 48 0.512 24.576 4 50 0.4096 20.48 5 70 0.32768 22.9376 Total 125.2736 Initial Investment 115.0000 Net Present Value at 25% 10.2736 NPV at 30% Year Cash Flow Discount Factor NPV 1 38 0.769230769 29.23077 2 42 0.591715976 24.85207 3 48 0.455166136 21.84797 4 50 0.350127797 17.50639 5 70 0.269329074 18.85304 Total 112.2902 Initial Investment 115 Net Present Value at 30% -2.70976 So, IRR For Project A = 25%+ {10.2736/(10.2736+2.7097)} x (30%-25%) =25%+3.95% =28.95% As the IRR of Project A is a positive one, it can be accepted, considering the remaining factors constant. IRR of Project B: Net Present Value at 25%: Year CashFlow Discount Factor NPV 1 43 0.8 34.4 2 43 0.64 27.52 3 43 0.512 22.016 4 43 0.4096 17.6128 5 43 0.32768 14.09024 Total 115.639 Initial Investment 115 Net Present Value at 25% 0.63904 Year CashFlow Discount Factor NPV 1 43 0.769230769 33.07692 2 43 0.591715976 25.44379 3 43 0.455166136 19.57214 4 43 0.350127797 15.0555 5 43 0.269329074 11.58115 Total 104.7295 Initial Investment 115 Net Present Value at 30% -10.2705 So, IRR For Project A = 25%+ {6390/(6390+102705)} x (30%-25%) = 25% +0.29% =25.29% As the IRR of Project B is a positive one, it can be accepted, considering the remaining factors constant. (h) How does a change in the cost of capital affect the projects IRR? The internal rate of return (IRR) is considered as the discount rate that nullify the present value of a particular projects projected cash inflows to the present value of the projects cost (interest rate) or equivalently, the IRR is the rate that forces the NPV to equal zero The  discount rate often used in capital  budgeting  that makes the net present value of all cash flows from a particular project  equal to zero. Generally speaking, the higher a projects internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. The logic behind the IRR method is: The IRR on a project is its measured rate of return. If the internal rate of return exceeds the cost of the funds used to finance the project, a surplus will remain after paying for the capital, and this surplus will accrue to the firms stockholders Therefore, taking on a project whos IRR exceeds its cost of capital increases shareholders wealth. On the other hand, if the IRR is less than the cost of capital, then taking on the project will impose a cost on current stockholders. It is this breakeven characteristic that makes the IRR useful in evaluating capital projects. (i) Discuss why the NPV method is often regarded to be superior to the IRR method? The IRR is defined as the discount rate that equates the present values of a projects expected cash inflows to the present value of the projects costs (Page 351). Additionally, when dealing with independent projects, the NPV and IRR methods will always yield the same accept/reject result. However, in the case of mutually exclusive projects, NPV and IRR can give conflicting results. One shortcoming of the internal rate of return is that it assumes that cash flows received are reinvested at the projects internal rate of return, which is not usually true A conflict exists if the cost of capital is less than the crossover rate. Two basic conditions can cause NPV profiles to cross, and thus conflicts to arise between NPV and IRR: (1) when project size (or scale) differences exist, meaning that the cost of one project is largest than that of the other, or (2) when timing differences exist, meaning that the timing of cash flows from the two projects differs such that most of the cash flows from one project come in the early years while most of the cash flows from the other project come in the later years (Page 355) The value of early cash flows depends on the return we can earn on those cash flows, that is the rate at which we can reinvest them. The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the cost of capital, whereas the IRR method assumes that the firm can reinvest at the IRR (Page 355). Because of the above criteria The NPV method is considered as more reliable method than IRR. The best assumption is that the projects cash flows can be reinvested at the cost of capital (Page 355). The IRR is a popular technique primarily because it is a percentage which is easily compared to the WACC. However, it suffers from a couple of flaws: The calculation of the IRR implicitly assumes that the cash flows are reinvested at the IRR. This may not always be realistic. Percentages can be misleading (would you rather earn 100% on a $100 investment, or 10% on a $10,000 investment?) Using both measures gives better results than using either alone. IRR is also useful alone in virtually all time-value-of-money problems.

Poem Analysis †Sonnet 116 Essay -- English Literature

Poem Analysis – Sonnet 116 ‘Let Me Not To The Marriage Of True Minds’ Study the first 12 lines of the poem. Discuss how Shakespeare makes a statement in the first and second lines, and then use lines 2-12 to give examples which supports his viewpoints. In the first two lines of the poem Shakespeare writes, Let me not to the marriage of true minds Admit impediments: love is not love The first line shows that he thinks you should not marry unless you are faithful. He says ‘let me not’ which means that he does not approve of the untrue or unfaithful minds marrying. The second line means that there will be obstacles in your way and you must be willing to face or overcome them. Otherwise ‘love is not love’, or you will not experience love at its most true. These first two lines show that Shakespeare will go on to explore the idea of faithful or true love and also the obstacles of marriage. In the next two lines of the poem Shakespeare looks at the possibility of somebody falling out of love with their partner. Which alters when alteration finds Or bend...

Classism and Its Effects in Society

Classism and its effects on Society James Bradley Cardinal Stritch University Instructor Kevin Nettesheim Intro to written communication April 17, 2013 Abstract Throughout history classism has played an important role in how people are perceived and treated. This goes as far as race, gender, financial status, and social class of individuals. For persons of any classification to prejudge another based on their background is morally and ethically incorrect, when God created man, he created man in his likeness. Therefore, I believe that no matter who you are or what cloth you come from, we all equal.Classism hurts society; it increases stereotyping, further demeans people, and It should not under any circumstance be tolerated or accepted. If classism should arise in any given the opportunity, it should be publicized and protested. What is Classism Classism is defined as a biased or discriminatory attitude based on distinctions made between social or economic classes. (Collins English di ctionary, 2009) In sociology, (which is the study of the development, organization, functioning, and classification of human societies,) classism has a distinct effect on human life. Collins English dictionary, 2009) Classism is a form of discrimination under the classifications of an individual’s rational needs, which includes; food, clothing, shelter, education, and respect based on the individual’s social class. Classism is a system of beliefs and cultural attitudes that rank people according to their economic status. This economic status is also known as social stratification, which is the idea of classifying people according to their group of socio-economic class.This classification deals with equalities or inequalities of economic, social, political, and ideological dimensions of society. Society ranks the stratification of people into layers of upper class, middle class, and lower class. Upper and middle classes are seen to be the richest and most educated of th e layer, while the lower class is to poorest. Effects of Classism Classism has a major effect on society mainly because it is a belief that has been passed down from generation to generation. Classism affects people on an economical and emotional level; it divides society into two parts.Those who have and those who do not have, this mistreatment mainly comes from the dominant more in control groups of society, the rich. It affects the subordinated groups of society, those who are the poor and it continues to cause pain and suppression among the lower classes of society to the extent of personal fulfillment or survival. Theorized, if you are not born into this dominant class, there is no room for you in society to someday become successful and without this privilege; you are stuck, left to dogs. Yet classism is not only judged by finances, it is also judge by race, gender and religion.Classism affects the minorities of society, African Americans, Hispanics, Asians, and women. The mis treatment of Africans dates back to the 1600’s, and the reasons for this so called classification results from slavery, lack of education, and social status. This division of this group further suppresses Africans; it depletes the want for success within this group. As being an African American, I can honestly say, â€Å"I know classism. † You are put into class of people who you may or may not be like, the only thing you have in common is being of the same race.To be prejudged on your color and to have that related to racial background is hurtful; there only two options after something like this. You can either better yourself or you fall into the black hole of failure. Failure can be caused by what others think of you and how you are treated. After being treated a certain way for so long you begin to transform into that individual, hint, â€Å"society can put you down. † It is same for other minorities in society as well; women are sometimes classified by what they cannot do. It is always been stated that a woman cannot complete the same task as a man.Therefore women have always had to fight for their rights, including purchasing property, voting, and fair wages. Classism has been a struggle for all. What can be done about Classism While classism affects society as a whole, there is much that can be done by both the dominant and subordinated groups of society to cease classism. The first step to stopping classism is to recognize and accept both parties as equals. No matter what race, gender, or social class you come from, we all human beings and together we strengthen our society.The belief of classism is taught at young age, individuals can start by instilling ethical behavior into their kids, so that they are able to prevent future behavior of classism. Ultimately, if we work together as a group we can stop classism. References classism. (n. d. ). Collins English Dictionary – Complete & Unabridged 10th Edition. Retrieved April 1 0, 2013, from Dictionary. com website:  http://dictionary. reference. com/browse/classism sociology. (n. d. ). Collins English Dictionary – Complete & Unabridged 10th Edition. Retrieved April 10, 2013, from Dictionary. com website:  http://dictionary. reference. com/browse/sociology

Drinking Water Scarcity and Conservation Essay - 1809 Words

In an age when man has forgotten his origins and is blind even to his most essential needs for survival, water along with other resources has become the victim of his indifference.† -- Rachel Carson -- The water you see around you, flowing freely, sparkling in the noonday sun, quenching your thirst, bathing you, providing you with life is all limited - there is no place on this planet where new water springs up from a source. Water has been recycled by nature over and over again since time began. Our drinking water at one time or another was way up high in the clouds, or streaming down a mountainside, or gushing out of â€Å"Old Faithful.† It cannot be created; it cannot be renewed by planting a â€Å"water tree;† no such tree†¦show more content†¦Now, much of it is from such sources as fertilizer running off farm fields and motor oil washing off highways.† He concludes, â€Å"It’s not a matter of getting the attention of a few corporations and cities. Now we’re trying to engage a lot more people.† How Mr. Evans is going to engage a lot more people is never mentioned. Perhaps when we reach critical levels of toxic elements in our water table than the people will become more involved. Drinking water is different in that we take it into our bodies. We need this water to live. If the water is undrinkable due to heavy metals, such as nitrates from farmers, or mercury from power plants, or by pollution from some other source of industry than the available drinking water becomes scarce. Informing the public is not enough to engage the people. Battles have been fought over water rights for many years from the Plaines Indians, cattlemen and ranchers all the way up to Mulholland stealing water from Owens Valley. Now the fight is between Environmentalist, Industries and the Government. While they discuss whether EPA reports tell the whole story, there exist an ever-increasing demand for water from an ever-increasing population. 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