Applied Managerial Finance

 

Applied Managerial Finance

 

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Applied Managerial Finance

 

NPV and IRR are modern methods of analysing investments; they are handy in the ranking of projects based on their viability. NPV discounts inflows and outflows accruing to determine the present value of investments with the difference of the two (Gallo, 2014). Projects with positive NPV are viable investments. NPV is not only realistic in the gauging viability of projects but also in recognizing time value of money. It ranks projects based reported NPV- a project with the highest NPV ranks first.

 

 

IRR analyses investments by equating the present value of cash outflow to the initial capital outlay; given this, determination of the rate is within the project (Kelleher & MacCormack, 2004). Ventures with an IRR higher than or equal to the cost of capital are acceptable; it is the break-even rate of borrowing funds from financial institutions. IRR considers the time value of money for cash flows accruing to an entity over the entire life of the project. Both IRR and NPV are consistent with the objective of maximizing the wealth of owners; positive NPVs increase the net worth of shareholders and IRR presents a rate for assessing the viability of an investment (Westerfield, Ross, & Jordan, 2001).

 

The NPV of the Apix expansion project is positive; it maximizes the owners’ welfare as it increases their net worth (Macabacus, 2014). The present value of cash inflows is superior to that of cash outflows. An IRR of 22% is higher than the cost of capital of 10%; it maximizes shareholders wealth. NPV and IRR are important in decision-making. They have the ability to influence the size of an organization and to increase the value of shares. Furthermore, undertakings of projects are irreversible; these two techniques can help avert failure of such efforts, which are capital intensive.