#1 Susan Mookhram

MondayJun 26 at 4:40pm

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Net present value is one issue that should be considered.  Net present value is the difference between the present value of cash inflows and the present value of cash outflows.  One of the most important parts of net present value calculations involve selection of an interest rate which should ideally relate to the cost of capital which would be incurred by the company.  Cost of capital is an idea which is essentially an approximation of the cost of funds which are in use by the company.  If the net present value is indeed positive, then the company can presume the investment is worthy of further consideration.  Another issue to consider is internal rate of return (IRR).  Where net present value helps to identify a pool of potential candidates for long term investing, IRR seeks to specify the rate of return for the investment.  IRR uses the same calculations with actual rate of return for each inflow to match the rate of return for the outflows.  Essentially considering net present value as an estimated rate where IRR presents the actual rate.  Those investments which offer the highest internal rate of return (IRR) would then be considered the best potential investments which should be sought out for investing.

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Collapse SubdiscussionJoel Judkins

#2 Joel Judkins

TuesdayJun 27 at 9:37pm

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Joel Judkins ACC206 Week 5 Discussion 1

Consider Net Present value.  The difference between present value cash inflows and present value of cash outflows is the net present value of an investment.  By evaluating the projected cash inflow the investment will create against the amount of debt or equity it will take to invest in it you can determine if it’s a good investment or not.  If the net present value is positive and stable then it’s a good investment.  This difference will show up as income on the financial statements. Cash from investing activities.

Consider internal rate of return or IRR. This works similar to the equation used by the net present value only it equalizes them and determines the percentage it takes for them to equal.  This will give the percentage of value the investment has.  If it is positive again the investment is a good one.  If the IRR is a negative percentage the investment is not profitable and should be avoided.  This will still show up as cash from investment activities, only now you have a percentage.

Consider the payback method.   The payback method is a calculation that determines how long an investment will take to pay back what it cost.  I call this going into the black, or cash positive.  If you spend 500,000 on a new plastics molding machine and molds to make Lego’s and they will produce enough product to earn 100,000 per year then it will payback in 5 years.  All the product produced after that will be pure profit because the investment has paid for itself (Wainwright 2012). This will show up after the depreciation for the machine has all been deducted and the profit will increase on that product after the payback period has been reached.

Reference:

Wainwright, S. K. (Ed.) (2012).  (Links to an external site.)Links to an external site.Links to an external site.Principles of accounting: Volume II [Electronic version]. Retrieved from https://content.ashford.edu/Links to an external site.Links to an external site.

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