FINANCE GROUP ppt for net present value and other methods

for finance purpose

1. NET PRESENT VALUE

2. NET PRESENT VALUE IN CAPITAL BUDGETING

3. Calculation for for Average Accounting Return Average Net Income: Sum of all Net Income/ Number of periods Where: Net Income represents the sum of net income over the specified period. Number of Periods represents the total number of periods for which the net income is being calculated. For example, Avg net income = ($18,000 + $6,500 + $29,650)/3 = $18,050

4. Pro and Cons of Net Present Value PROS CONS 1. Time Value of Money Consideration: - NPV adjusts future cash flows to their present value, recognizing the time value of money and providing a more accurate evaluation in today's terms. 2. Simple Decision Rule: - NPV offers a clear decision rule – a positive NPV indicates the project is expected to generate value, simplifying and clarifying the decision-making process. 1. Sensitivity to Discount Rate: - NPV is sensitive to changes in the discount rate, making it crucial to choose an appropriate rate, as even small adjustments can significantly impact the NPV and investment decisions. 2. Assumption of Reinvestment Rate: - NPV assumes reinvesting cash flows at the discount rate, aiding calculations but potentially deviating from real-world reinvestment scenarios, introducing a level of abstraction.

5. Average Accounting Return and AAR in Capital Budgeting AAR - is one of the approach to capital budgeting Formula: AAR= Average net income/ Average book value Rule: a project is acceptable if the AAR exceeds a target AAR

6. PRO CONS Pro and Cons of Average Accounting return Usually easy to understand and calculate in comparison to other techniques Information is easily available in financial documents of the company AAR is not a rate of return- it ignores the time value (even figures occur at different times, they are treated the same) It lacks objective cut off period It uses net income value and book value instead of cash flow and market value

7. Calculation for for Average Accounting Return