Select the term that corresponds to each of the given descriptions- (N.pdf

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Select the term that corresponds to each of the given descriptions. (Note: There is only one possible answer for each description.) Descriptions Terms This analysis involves a comparison of the expected and actual results for a given capital project and the development of an explanation for any disparity between them. A graph that illustrates the relationship between a project's net present value (NPV) calculated at a range of hurdle rates. The discount rate at which the present value of a project's cash outflows is equal to the present value of the sum of its future cash inflows, assuming that cash flows are reinvested at the firm's required rate of return. Also called a firm's hurdle rate, it is used as the discount rate in a firm's net present value (NPV) calculations or the basis of comparison for a project's internal rate of return (IRR). A capital budgeting analysis that determines if a capital asset should be purchased to take the place of a worn out, damaged, or obsolete existing asset. Traditional payback period.

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WORKING CAPITAL PRACTICES WORKING CAPITAL PRACTICES Tanelle Peppers Business 650 Ashford University WORKING CAPITAL PRACTICESCapital budgeting are the planning methods used by organza tons to decide which of its long Term investments are worth pursuing. Since most organizations are at the moment restructuring Their working capital practices, in order to discover untapped cash sources .The main methods Used for capital budgeting are Internal rate of return, Net present value, Real options analysis, Payback period, Profitability index, and Equivalent annuity. Net Present Value It’s used in estimating each potential project's worth using a discounted cash flow valuation. The valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the discount rate, so selecting the proper rate–sometimes called the hurdle rate–is critical to making the right decision. This should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix. Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project's risk is higher than the risk of the firm as a whole. Internal Rate of Return The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. The IRR method will result in the same decision as the NPV method for non-mutually exclusive projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows. Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR, which is often used, may select a project with a lower NPV. One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. Accordingly, a measure called "Modified Internal Rate of Return (MIRR)" is often used. Payback Period Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself.” All else being equal, shorter payback periods are preferable to longer payback periods. The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost. Profitability Index Prof.

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PART 1 Net present value represents the difference between the present value of cash inflows and outflows (Gallant, 2023). A positive NPV means that an investment is worth investing in, NPV of zero would indicate that the investment would be balanced between the cash inflows and outflows, if the NPV is negative than the investment would not be worth investing in. The internal rate of return or IRR is used by companies to estimate how much profit would the investment generate over time. NPV and IRR can help a company make smarter decisions and reduce risk when it comes to investing. What are things/scenarios that would greatly affect the NPV & IRR? and why? PART 2 Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in Capital budget and investment planning to analyze the profitability of a projected investment or project. It is essential to understand the different risk and factors that are taken into countability when it comes to the investments being done. Starting off with how differential risk that can be incorporated into NVP analysis. The following would be done by increasing the discount rate for those different projects that hold a higher risk. This tool will reduce the present value of cash flows, which means that it increases uncertainty and risk. Now lets refer to IRR analysis "The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the NVP of all cash flows equal to zero in a discounted cash flow analysis. Leading to apply that the riskier the project, the higher IRR less than riskier ones. What other things are essential to reduce the risk on investments? What steps must be taking to lower the risk or what things must be considered prior looking into the NVP & IRR?.

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PART 1 Net present value represents the difference between the present value of cash inflows and outflows (Gallant, 2023). A positive NPV means that an investment is worth investing in, NPV of zero would indicate that the investment would be balanced between the cash inflows and outflows, if the NPV is negative than the investment would not be worth investing in. The internal rate of return or IRR is used by companies to estimate how much profit would the investment generate over time. NPV and IRR can help a company make smarter decisions and reduce risk when it comes to investing. What are things/scenarios that would greatly affect the NPV & IRR? and why? Please be very detailed. Thanks PART 2 Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in Capital budget and investment planning to analyze the profitability of a projected investment or project. It is essential to understand the different risk and factors that are taken into countability when it comes to the investments being done. Starting off with how differential risk that can be incorporated into NVP analysis. The following would be done by increasing the discount rate for those different projects that hold a higher risk. This tool will reduce the present value of cash flows, which means that it increases uncertainty and risk. Now lets refer to IRR analysis "The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the NVP of all cash flows equal to zero in a discounted cash flow analysis. Leading to apply that the riskier the project, the higher IRR less than riskier ones. What other things are essential to reduce the risk on investments? What steps must be taking to lower the risk or what things must be considered prior looking into the NVP & IRR? Please be very detailed. Thanks.

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Compare and contrast the Internal Rate of Return (IRR), the Net Present Value (NPV) and Payback approaches to capital rationing. Which do you think is better? Why? Solution Capital rationing is used when the capital is short or limited in supply and the organization cannot afford to choose all the projects. Therefore, organizations have to make best use of available capital resource and hence it chooses the project based on profitability. Internal rate of return is a rate of return at which NPV is zero. IRR is a measure of profitability. NPV or net present value is the difference between Present value of cash flows and initial investment. It measures the net addition to shareholders wealth. Payback period is the period of time the project takes to recover the initial investment. Payback period is the measure of liquidity. Profitability index is the best method when capital is rationed. If Profitability index method is not available, we should prefer using IRR method .

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