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Essentials of corporate financial management
Finance & Accounting
Pages 8 (2008 words)
Student Name: XXXX Tutors Name: XXXX Subject: Accounting Consultancy Date: 19/10/11 Accounting Consultancy Client 1 In the first instance, the client is considering using net present value (NPV) as the basis for assessing the merits of the current project.
In addition, the tool can easily be modified to reflect updated information or changes in perceived risk, this is done by amending either the cash flows used or using an alternative discount rate. NPV however, is not without its problems. While the method is easily understood by those with an accounting background, a positive NPV leading to the acceptance of a project and a negative NPV a rejection. The actual calculations can be difficult to explain to a non-financial manager, the method can also be time consuming to set up in the first place. As such, the client may choose to use alternative methods including payback period or internal rate of return (IRR). Payback period is tool which gives a simple approximation of the length of time a project will take to pay back based upon an undiscounted cash flow. As such, the tool is easily explained to the non-financial manager but can be seen as oversimplified, not taking into account the time value of money (Arnold, 2007, Tennentt 2008). IRR on the other hand is similar to NPV in that the tool works with discounted cash flows however, instead of delivering a bottom line return on the project, the tool returns a return as a percentage in relation to the discount rate used. ...
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