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This week we discuss different analytical techniques, in regards to operating a business. In many businesses, Capitol investments are mandatory. Business homes certainly are going to be anxious to know when they will recover such an initial cost of an investment. When evaluating potential capital investments by your small business in various projects, the Internal Rate of Return, or IRR, can be a valuable tool in assessing the projects most worth pursuing. IRR measures the rate of return of projected cash flows generated by your capital investment. The IRR for each project under consideration by your business can be compared and used in decision-making. Internal rate of return is measured by calculating the interest rate at which the present value of future cash flows equals the required capital investment. The advantage is that the timing of cash flows in all future years are considered and, therefore, each cash flow is given equal weight by using the time value of money.The IRR is an easy measure to calculate and provides a simple means by which to compare the worth of various projects under consideration. A disadvantage of using the IRR method is that it does not account for the project size when comparing projects. Planning to purchase a new asset is quite the process. The company needs an installation plan, operating staff, and of course a financial plan. Budgeting is a cash-based concept. A company could have over $10 million in sales, but if there is no cash available for the purchase, it could be difficult to make. There are three types of capital budgeting techniques to consider for your budgeting purposes. They are: payback method, net present value method, and internal rate of return method.
The three capital investment techniques are net present value, internal rate of return, and payback. To determine the net present value you take the cost of an investment and subtract it from its present value. If the net present value is positive then it indicated that it will yield a rate of return higher than predicted. A net present value being negative means the return is less than predicted. Internal rate of return is hen the rate at which present value of cash inflows and the cash outflows are equal. Mainly if the internal rate of return is higher than it will be a more profitable investment. Payback method is found by taking the net cost of investment and divide it by the annual net cash inflow. The payback method shows you how long it will take to recover the cash outflows or cost of an investment. For net present value the advantages are you can tell if you have the money to make an investment and an idea of the cash inflow over a few years. The disadvantages for net present value is that the amount you think you may make off an investment might not always happen and it seem to be the more difficult one with all the amounts that have to be added in to calculate the net present value. Internal rate of return advantages are when calculating with internal rate of return you get a better idea of what the amounts are and it is the rate that will produce a zero net present value. The disadvantages are that if you have an uneven cash flow then it makes the computations more complex and trying to find the zero net present value can be time consuming. Payback methods advantages are you can figure out how long it takes to recover from an investment and it is the easiest and less time consuming. The disadvantages are that it does not measure profitability and does not measure the difference between the alternatives.
When your peer critique your paper how does it help you? Does it stung you by what they say? if so how? How will you critique your peers paper in the near future?
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