Question
From my experience, NPV or Net Present Value method is the most sophisticated and reliable method for evaluating complex capital budgeting issues. The process: estimating
From my experience, NPV or Net Present Value method is the most sophisticated and reliable method for evaluating complex capital budgeting issues. The process:
estimating the amount and timing of cash inflows from the project. estimating the mount and timing of cash outflows on the project. Determining the initial investment required to get the project moving. The most important, but subjective factor, is the discount rate applied to the overall project. The discount rate is the most significant factor in the decision. This is where if the project goes bad, the opposing counsel will hire litigation support experts to attack the discount rate. It is very subjective.
However, from what you have learned, the discount rate used should be a composite of the weighted average cost of capital for the firm, plus a factor to compensate the firm for the amount of risk on the project and their necessary profit on the project. Without sufficient profit, no one would consider taking the added risks.
The NPV would be used for evaluating new equipment purchases, the decision to lease or buy a car and to acquire a new line of business. How might you use it in your life?
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