04 May WHATS THE DIFFERENCE BETWEEN NET PRESENT VALUE AND INTERNAL RATE OF RETURN?
Option 2 – While financial analysis is CRITICAL and should be a key part of any significant investment decision, there are other (non-financial) considerations that will also be considered by management before making a final decision. Just because a project or proposal has a positive NPV, does not necessarily mean it should be undertaken. What are some of the non-financial considerations that should be considered by management? Share a project that you led that had strong financials but was not approved and discuss whether you would have proceeded differently if you were the decision maker.
The discipline of management accounting contains a broad collection of analytical tools that support decision-making. It is critical for managers to be able to evaluate and communicate the financial attractiveness (and risks) of potential investments. This week we will focus on key capital budgeting concepts and tools; the time value of money, return on investment, discounted cash flow techniques, payback period, and internal rate of return. Ensuring that potential investments will provide a positive economic payout is the first step in analyzing options, selling your ideas, and making strategic business decisions.
References
Finance for Nonfinancial Mangers – Chapter 9
Book Note: Typo Corrections
1.) Page 138, Payback Period Table, Payback Period is 5.5 years, not 1.5 years
2.) Page 145, in italics at the bottom it says, “Never invest in a project with an NPV or an IRR less than zero.” While generally this is a reasonable principle relative to NPV…IRR should be compared to the discount rate, not to zero.
Whats the difference between net present value and internal rate of return? How are they used?
Rule of 72 for Doubling an Amount
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