The theoretical rationale for the NPV approach to investment appraisal Essay

The theoretical rationale for the NPV approach to investment appraisal - Essay Example 383). It is originally attributed to Irving Fisher in his 1930 book, The Theory of Interest. The most common application of the Fisher model of NPV is in deriving the value of the net contribution of a potential investment to shareholder value, or for budgeting purposes, when deciding among alternative projects when available capital is limited and may not be sufficient to finance all the projects. In fact, the NPV is a valuation method that may be used to decide situations for which a stream of future returns and future payments may be estimated. The power and allure of the NPV is that it serves so well the role of financial markets that allows individuals and corporations to transfer money between dates (MacMinn, 2005:1). By creating a rationale valuation tool linking money in two different points in time, it becomes possible for the individual to â€Å"save by transferring dollars from the present to the future,† while the corporation may â€Å"invest and finance the investment by transferring dollars from the future to the present† (p.l-2). However, for the model to work requires knowledge of the cost of capital from which the discount rate is derived. The NPV is derived by discounting all future cash inflows and outflows to the present. By â€Å"discounting† is meant calculating the equivalent value in the present of all future cashflows, assuming these cashflows appreciated over time by an annual compound rate such as the cost of money. This â€Å"discount rate† is that rate of return that an investment (of similar risk) in the financial markets may be expected to earn. Otherwise stated, if an amount equivalent to the net present value were invested today in a financial instrument of similar risk as the alternative or project being considered, the rate of return of which is equal to the expected return on the investment, then such amount would represent the same benefit that may be derived from th entire stream of future cash flows yielded by the instrument invested in. When the discount rate has been determined, the present value of a single sum N years in the future may be found by multiplying this single sum by t he discount factor pertaining to the discount rate applied over N number of years. In mathematical terms: Where: PV = present value of the future single sum R = the future single sum N = the number of compounding periods from the present to the time the single sum is realized or expected i = the discount rate The discount factor is equivalent to the factor multiplied by the single sum to obtain the present value. It is denoted by the expression Discount factor (single sum, discount rate i, N periods) = Where there are more than one cash flow, the several cash flows together make up a cash flow stream. In this instance, the sum of the present values of the individual cash flows is equal to the present value of the entire cash flow stream. When the cash flow is an inflow (or revenue), then the cash flow is positive and its present value is also positive. When the cash flow is an outflow (or cost), then the cash flow is negative, and its present value is also negative. Therefore the su m of present values for the inflows and outflows nets out the costs from the revenues, resulting in the net present value. Illustrating the theoretical rationale of the NPV To illustrate the rationale of the NPV approach, assume that management has to choose from three possible investments A, B and C, each with a life of five years and none of which are mutually exclusive, with the following expected future cash inflows and outflows: The cash flows at year 0 (the present) represent the initial investments which are costs and therefore are denoted by the

Group project outline Essay Example | Topics and Well Written Essays - 1000 words

Group project outline - Essay Example In addition to this, the market demand and needs of the customer towards this product segment is changing at a continuous rate. Now-a-days, people are trying to consume fuel efficient cars due to the hike in fuel prices. Recently, several automobile organizations are implementing green strategies in business. Moreover, several leading organizations, such as Ford and Toyota introduced electric car to reduce the consumption level of fossil fuel. Lack of use of fossil fuel can reduce the emission level of carbon. In addition to this, it reduces the operating cost of an organization. Therefore, the organization can use economic pricing strategy. Now-a-days, people are trying to consume fuel-efficient low priced cars due to their low disposable income. However, research on this product will help all the group members to learn about the market demand of this product. There are several types of cars, such as hatchback, Sedan, SUV and MUV. Research on each car segment will help the group mem bers to understand about the purchasing behaviour of people and strategies that are implemented by several automobile manufacturing organizations (Noel, 2009, p.117). The objective of research is to know the purchasing behaviour of people towards this product. Project Plan There are four members in this group. Each group member has different roles and responsibilities to complete the project. Primary and secondary data collection method has been utilized in order to gather appropriate data. Both these data collection methods have significant advantages. Primary data collection method will help this group to gather real time and valid data (Mooi and Sarstedt, 2011, p.39). On the other hand, secondary data collection method will help to gather a large number of data set (Malhotra, 2008, p.25). Both of these data collection method will help this group to achieve successful and expected research outcome. 2 members from the group have taken the responsibility to gather primary data. They are going to take interview of 10 people to gather valuable primary data and information. Total sample size has been considered for this research is 10. Out of the 10 individuals, 6 are common people who have cars and 4 are store managers of different car making and distributing organizations. 1 member will take the interview of 6 customers and other will take the interview of 4 managers. Another group member is responsible for gathering secondary data. Therefore, it is clear that 3 members of the group are engaged in the data collection process. The fourth group member will be responsible for analyzing the collected data and provide a research outcome based on his or her analysis. Key Challenges The key challenges that have been faced in the group activity for the project on studying the purchasing behaviour of the customers for various types of cars have been explained as follows. The challenges could be faced in the individual level as well as the group level while conducting th e tasks involved in the project plan. Since four different people were engaged in the separate tasks of data collection as per the primary and secondary research methods, the data analysis and the evaluation, difficulties could be faced due to the mismatch of the expectations of the people that have collected data and the people who have conducted the analysis and evaluation. The various parameters on which