You are watching: The net cash flow of a particular investment project
Can consist of cash comes in (from revenues) or cash savings together a result of the invest or any type of residual worth left in the asset at the end of its helpful life
Can consist of any kind of cash at first spent on the investment, any kind of operating costs, consisting of ongoing costs or one time maintenance and repairs, etc. To preserve the investment, and any expenses to dispose of the asset in ~ the finish of its advantageous life
1. Company identifies potential investments : "Wish list" of possible investments 2. Estimate future net cash operation :Try to identify net cash flows because that each alternative3. Analyze potential investments: Use rapid computations (Payback and ARR) to determine which investments should instantly be discarded. For those investments left come consider, company uses time value of money principles to determine greatest yield come the company. (NPV or IRR) 4. Choose in between different alternatives, typically that yield highest NPV or benefit (Could involve capital rationing) 5. Perform article audits: go the investment do as expected?
Normally analyze expenses of new investment vs intended savings/benefits end the long run. Use many estimates and assumptions as soon as modeling various investment decisions. 4 techniques are used to attain this :Pay back PeriodAccounting rate of Return internal rate the returnNet current Value
Length the time that takes to gain "paid back" because that an initial investment. The shorter the "payback" the much more desirable the investment. Ignores time value of money and ignores any other cash flows that take place after the payback period.
Focuses ~ above cash operation operating revenue (accrual accounting) so any non-cash items related to revenue calculations should be changed for. Investment is yes if ARR exceeds required rate that return and also if not, should disregard. Ignores time value of money.
Represents the expected rate (interest rate) a agency can earn on one investment, based on discounted cash operation (time worth of money) If IRR is less than companys required rate the return, must invest!
Concept that money now is worth an ext than the same amount in the future, since it can be supplied to earn interest.
Concept that money today is worth an ext than the same amount in the future, due to the fact that it have the right to be offered to earn interest.
A collection of cash payments that is same in amount for each interest duration N= variety of compounding attention periodsI= industry rate the interest
When solving for IRR, you are solving for the "I" in the problem. If IRR is greater than the compnays required return, the company should continue with the investment.
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Used to identify which task a company should invest in, if minimal resources and also have several tasks with positive NPVs. Computed the number of dollars went back for every dollar invested. Help to consider different investments and the various initial costs of each investment.