/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q21RQ Why are net present value and in... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 26: Q21RQ (page 1464)

Why are net present value and internal rate of return considered discounted cash flow methods?

Short Answer

Expert verified

NPV and IRR are called the discounted cash flow method as they are based on the time value of money and discount the future cash flow to the present value.

Step by step solution

01

Meaning of Discounted Cash Flow

Discounted cash flow is based on the time value of money. It is the amount that represents the present value of a future amount.

Time value of money states that the value of money today would not be equal to the value of money tomorrow due to the factor of interest payment.

Thus the discounted cash flow equates the future cash flow to the present value by discounting the interest factor.

02

Net present value and internal rate of return considered as discounted cash flow methods

streams and present cash outflow. Under this method,future cash flows are discounted to the present value.

The internal rate of return is the rate at which thepresent value of all future cash flows equates with the present value of cash outflows.

Conclusion:-

Thus as discussed, these two methods use the time value of money concepts and discount the future cash flow to the present value by considering the interest rate factor; these methods are called the discounted cash flow method.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Lockwood Company is considering a capital investment in machinery:

Initial investment $ 600,000

Residual value 50,000

Expected annual net cash inflows 100,000

Expected useful life 8 years

Required rate of return 12%

8. Calculate the payback.

9. Calculate the ARR. Round the percentage to two decimal places.

10. Based on your answers to the above questions, should Lockwood invest in the machinery?

What are some criticisms of the payback method?

Match the following business activities to the steps in capital budgeting process.

Steps in the capital budgeting process:

a. Develop strategies

b. Plan

c. Direct

d. Control

Business activities:

1. A manager evaluates progress one year into the project.

2. Employees submit suggestions for new investments.

3. The company builds a new factory.

4. Top management attends a retreat to set long-term goals.

5. Proposed investments are analyzed.

6. Proposed investments are ranked.

7. New equipment is purchased.

Question: Defining capital investments and the capital budgeting process

Match each capital budgeting method with its definition.

Methods

1. Accounting rate of return

2. Internal rate of return

3. Net present value

4. Payback

Definitions

  1. Is only concerned with the time it takes to get cash outflows returned.
  2. Considers operating income but not the time value of money in its analyses.
  3. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness.
  4. The true rate of return an investment earns.

Question: Using the payback and accounting rate of return methods to make capital investment decisions

Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the \(11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley鈥檚 managers developed the following estimates concerning the expansion:

Number of additional skiers per day 121 skiers

Average number of days per year that weather conditions

allow skiing at Hunter Valley 142 days

Useful life of expansion (in years) 7 years

Average cash spent by each skier per day \) 241

Average variable cost of serving each skier per day 83

Cost of expansion 11,000,000

Discount rate 10%

Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.

Requirements

  1. Compute the average annual net cash inflow from the expansion.
  2. Compute the average annual operating income from the expansion.
See all solutions

Recommended explanations on Business Studies Textbooks

Influences On Business

Read Explanation

Business Operations

Read Explanation

Managerial Economics

Read Explanation

Corporate Finance

Read Explanation

Strategy

Read Explanation

Strategic Direction

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.