Write a minimum of 175 words:
Distinguish between the 3 capital investment techniques of (1) Net Present Value, (2) Internal Rate of Return, and (3) Payback Method.
Describe what you consider to be the top 2 advantages and 2 disadvantages of each technique and provide an example to support your top advantage of each method.
You’ve probably heard of the three capital investment techniques: Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Method. But what do they all mean? And how do you use them? Here’s a quick guide to help you understand which technique is best for your particular situation.
Net Present Value (NPV) is a measure of the profitability of an investment. It is calculated by taking all future cash flows and calculating the present value of each one. The sum of these values gives you your net present value.
This method can be used to determine whether or not it’s worth spending money on something today, because if you spend $100 today, but that same $100 will have years later in retirement when you’re much older and retired from work/schooling etc., then it might not be worth spending that money now because after paying taxes on whatever income it produces during its lifetime, there won’t be much left over for retirement savings unless someone comes up with some clever way around taxes altogether!
The internal rate of return (IRR) is a rate of return that equates the present value of all cash flows with the initial investment. An IRR can be used to compare capital investment opportunities, evaluate projects that have multiple cash flows and calculate payback periods.
Examining an example: Suppose we have $100,000 to invest at an interest rate of 10% per year for 5 years, compounded annually. We also know that our net income after tax will be $20,000 per year for each year (assuming no taxes). Since this sum is less than our original investment cost ($120K), we want to make sure we are getting good value from our money by evaluating whether or not this project has enough ROI potential before committing more funds into it.
Payback Method:
The payback method compares the cost of an investment to the cash inflows that it generates. It’s also known as the net present value (NPV) or internal rate of return (IRR) method, in which you compare your investment’s NPV with its initial value, plus any earnings on those investments. The faster your payback period, the better—that is, if you can earn more money than what was invested within a year or less then this would be considered better than one with a longer payback period that takes multiple years before seeing returns match outlay costs. In other words: If someone gives you $10 today but it takes three years before they see anything come back in return for their generosity then they’re losing out on $3 per year because there’s no way around having to wait so long between giving someone something and getting something back from them!
You need to understand the three different capital investment techniques.
Net Present Value (NPV) is used to compare different projects. Internal Rate of Return (IRR) is used to compare similar projects. Payback Method is used to compare projects with different payback periods
Capital investment is the process of investing money in order to get a return on it. Capital investments are made in order to generate revenue and increase profitability. There are three different techniques used by companies when calculating their capital investments: Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Method. Each technique has its own strengths and weaknesses depending on the situation at hand, but it’s important for investors to understand how they work so they can make an informed decision about which method would be best for their company’s situation.
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