StudentShare solutions
Got a tricky question? Receive an answer from students like you! Try us!

Essay example - The theoretical rationale for the NPV approach to investment appraisal

The theoretical rationale for the NPV approach to investment appraisal Essay example
Masters
Essay
Finance & Accounting
Pages 10 (2510 words)
Download 1
Explain the theoretical rationale for the NPV approach to investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches.
Net Present Value Method

Extract of sample

383). It is originally attributed to Irving Fisher in his 1930 book, The Theory of Interest. The most common application of the Fisher model of NPV is in deriving the value of the net contribution of a potential investment to shareholder value, or for budgeting purposes, when deciding among alternative projects when available capital is limited and may not be sufficient to finance all the projects. In fact, the NPV is a valuation method that may be used to decide situations for which a stream of future returns and future payments may be estimated.
The power and allure of the NPV is that it serves so well the role of financial markets that allows individuals and corporations to transfer money between dates (MacMinn, 2005:1). By creating a rationale valuation tool linking money in two different points in time, it becomes possible for the individual to “save by transferring dollars from the present to the future,” while the corporation may “invest and finance the investment by transferring dollars from the future to the present” (p.l-2). However, for the model to work requires knowledge of the cost of capital from which the discount rate is derived.
The NPV is derived by discounting all future cash inflows and outflows to the present. ...
Download paper
Not exactly what you need?

Related papers

Investment Appraisal Techniques
Some of the investment appraisal techniques used range from Net Present Value (NPV), Accounting Rate of Return (ARR), Internal Rate of Return (ARR) and Payback Period. Net Present Value (NPV) As one of the investment appraisal techniques, net present value (NPV) method ensures that the value of all the expected future cash flows is calculated into the present values (Droms, & Wright, 2010). More…
5 pages (1255 words)
Investment appraisal and NPV analysis
Capital Budgeting is the other name for Investment Appraisal. Every firm, company or enterprise is faced with the decision about which investment opportunities they are to choose from all the options available. The primary task of any enterprise is to maximize the wealth of its shareholders. So taking the right decision at right time is one of the key roles of any company. It is required for the…
8 pages (2008 words)
Investment Appraisal Project
WACC=wdkd(1-T)+wpkp+wsks Where  Kd = interest on debt  Kp = cost of preference shares  Ks = cost of shares and retained earnings.  WACC is calculated by multiplying the cost of equity by the market value of the equity and cost of debt by the market value of the debt. Cost of equity can be defined as the minimum rate of return that a company must generate and offer to their investors in order…
8 pages (2008 words)
Investment appraisal under uncertainty
Literature review Real option valuation calls for an elaborate and a firm strategy to form a conceptual tool to make the decision for the company (Kim & Sanders 2002). The most appropriate tool to be used in uncertainty cases is using real option as a technique to assess investments for contexts with high market, technical and technological uncertainty (Billington, Johnson & Triantis 2002). This…
5 pages (1255 words)
Investment Appraisal
Investment Appraisal …
9 pages (2259 words)
Investment Appraisal: Matero Corp
The management will have to evaluate the projects which will generate stable cash flows for Matero PLC for at least 1 year. From the onset, we consider the possible consequences of Matero accepting or rejecting the project of procuring the machinery and plant. For this reason, we emphasise on the determination of the cost of capital whether there will be any form of financial leverage or not. If…
6 pages (1506 words)
Investment appraisal
This analysis has been conducted based on several financial theories related to equity valuation. 1 Introduction 1.1 History of Google Google, a name synonymous with world leader in specializing in internet related services and product. The product and services offered by Google are vast and its operations are expanding at a rapid pace. The primary services offered by this giant corporation…
6 pages (1506 words)