FIN 571 University of the Pacific Accounting Discussions

Net present value and the payback method are the two techniques that come to mind if I were using them for personal upcoming projects. I’m going to assume that my upcoming projects are exploring new companies to invest in. Net present value is helpful in deciding how profitable a company is. The information it shows are projected earnings, anticipated costs and the definition of NPV, whether positive or negative, shows the profit or loss the company has.

The payback will be helpful because its job is to project incoming cash flow from a project and determine the break even point. The point where you break even from what you put in, and begin to make a profit. This will be helpful if the company if just starting out and making projections and goals of what is needed to get inventory stocked to make a profit. The drawback from the payback method is it does not take into account the time value of money

Good evening,

I am sorry for the late response this week has been quite challenging chapters. I under stand that 3 of the more common capital budgeting techniques are Net present Value, Internal Rate of Return, and a quick easy method called the Payback method.

Payback method is the easiest to understand. If you invest $20 and the investment makes $5 a month your investment will be paid off in 4 months. This is a simple, and quick way to decide if the investment is worth the cost and how long it will take to pay off the investment.

Net Present Value is where I begin getting confused. I do understand that a dollar that i have today is worth less in a year the problem I have is selecting the correct cost vs. cash flows and how and when to add multiple years.

Internal Rate of Return is like the white buffalo. The formula I believe is part of my issue because I do not have a strong math back ground. Then like all formulas if you do not understand when and where to plug numbers the final result will never be correct. I have found IRR calculators online but I am still not sure if the correct numbers are being plugged in.

I do think that all 3 are useful in there own way, and that all companies can benefit from using all 3. But with that said I do understand that they each have limitations such as Payback method is a generic quick way to determine if a investment is viable, but with depreciation of money and many other factors this is not a sure fire method on determining what may be best for your company. NPV and IRR are much better at comparing multiple investments and years.