StudentShare solutions

# Accounting and Corporate Finance - Essay Example

## Extract of sampleAccounting and Corporate Finance

It follows the principals of having discounted cash flows. The formula to find out the Net present value precisely can be written as: Cash flow (today i.e. year 0) + Cash flow (1 year from now) [/1+r (cost of capital)]^1 + Cash flow (2 years from now)/](1+r)^2 Cash flow refers to the amount of expected cash to be received at a certain point in time X years from now. Cash flows can either be negative or positive. An inflow of cash is a positive cash flow such as an income whereas an outflow is represented with a negative sign and denotes an outgoing cash amount due to for instance expenditure. If the NPV of a certain project equals zero, it denotes that the project is a break-even project; working at no profit-no loss. In simple words it means that the amount of capital invested is exactly equal to the return that would be generated by undertaking the project. A project should be taken up or initiated only if the net present value is at least zero or greater than zero. Even though the calculations of Net Present Value are fairly simple and convenient, it is still quicker to use a financial calculator for these calculations because if there are a large number of cash flows, it will become very inconvenient and time consuming to make the calculations with the formula (Brigham et al, 2010). IRR (Internal rate of Return) IRR is the value where the NPV is equal to zero. It is the optimal value where a project is most beneficial. IRR can gauge the profitability of a proposed investment by taking into consideration the concept of discounted cash flows. IRR is not as easy to calculate as Net Present Value especially if each cash flow is different every year therefore it needs to be calculated using financial calculator. If not, then it is done on the basis of trial and error. The IRR can also be calculated in Microsoft Excel but it begins with guessing. IRR is very closely related to Net Present Value and it marks the next step to the calculation of Net Present Value. The IRR is the yield at which the investments constitute of cash outflows and inflows that occur at a certain time period in a fixed amount (Helfert, 2001). Profitability Index: Profitability Index is basically a measure of the per dollar value of the initial investment spent on a project. This means that if a project’s PI is 1, then the project will give a break-even value of return in comparison to the initial spending done on it. If the value is below 1.0, it means that the project is going to incur a loss and the investment done on it will be greater than the relative return it will give back over the years. If the Profitability Index is greater than 1 then the project can be accepted as it will be giving a profit. For mutually exclusive projects, the project with the higher Profitability Index is a better option. It is calculated as: Present Value of future cash flows/initial cost (ACCA, 2008). Discounted Payback Period: Payback period is another technique used to measure the viability of projects in terms of the number of years that it takes to pay back an initial investment. It is measured in number of years till recovery and the following formula can be used to measure it. No. Of years prior to full recovery+ Unrecovered cost at beginning of year/Cash flow during full recovery year (Kinney et al, 2009). b) Discuss the results for the numerical examples NPV Year CF Project First CF Project Second 0 (1000) (1000) 1 500 500 2 600 400 3 700 300 4 800 100 Project First: (1000)+ 500/1.10^1+600/1.10^2+700/1.10^3+800/1.10^4 = -1000+ 454.54+ ...Show more

## Summary

The Net Present Value refers to the value of a future amount today.It basically helps in finding out whether a project is profitable or not.It requires finding out the present value of each future cash flow discounted at a specific value…
Author : litzy51
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Accounting and Corporate Finance"
with a personal 20% discount.
Grab the best paper

### Related Essays

Finance and Accounting Essay: Corporate Social Responsibility
Corporate social responsibility (CSR) is an essential facet of the business world in the last eighty years. As early, as the 1930’s idea of the social responsibility of organisations has already been alluded and discussed by some practitioners (Hemingway, 2002).
20 pages (5000 words) Essay
Corporate finance
.....Financial Times Advanced Corporate Finance Assignment Name Surname Educational Institution Introduction It was estimated that 55,000 acquisitions valued at \$1.3 trillion were materialised in the 1980s. Due to globalisation, the merger and acquisition activities reached \$3.44 trillion in 2010.
6 pages (1500 words) Essay
Application to Imperial College Master in Finance
I particularly desire to work in the commodity market, as I always had a strong interest in the sustainable development concept and the energy sector. There are multiple benefits to be gained by working in the commodity market. First of all, it would give me great exposure to the energy sector.
4 pages (1000 words) Essay
Corporate finance and Financial Accounting
Currently, corporations and other business organizations expand their operations to expand the client base and attract additional profits within the company. Any form of venture undertaken by an organization entails additional capital; hence an increment in the level of risks (Perks & Leiwy, 2010).
8 pages (2000 words) Essay
Corporate finance (Accounting)
Gosling and Hopkins (G&H) PLC, the producer of food products in UK market, have now decided to expand its business operations. For this, the company requires adequate source of funds, the quantum of which should be relevantly decided by the Finance Department of the company in detail.
8 pages (2000 words) Essay
Corporate finance
The other notion that dividend decisions also affect the value of a listed company proceeds from thinking along similar lines. Unfortunately (or fortunately, depending on how one looks at it),
18 pages (4500 words) Essay
Corporate Finance
each gearing level; to determine the EPS for each level of gearing under a bad year or good year; to construct a graph where EBIT and EPS are the axes and , using the EBIT-EPS data that will be developed, plot the data on the graph and discuss the possible ranges where lower
10 pages (2500 words) Essay
Corporate finance
ort for the finance minister about development of standard corporate reporting regulations in the country and importance of standard corporate governance regulations as an important part of corporate reports published by the public companies. Therefore, this report will deal
8 pages (2000 words) Essay
Finance accounting
existence of accounting records is to minimize or reduce the effect of principal-agent problem; its impact is reduced by measuring and close monitoring of the performance and reporting the results to parties concerned. Financial accounting is a discipline which has evolved over
12 pages (3000 words) Essay
Coursework: Corporate Finance and Financial Accounting
the company was also affected during the financial debt crisis in the economy. Burberry provides employment to huge number of people
10 pages (2500 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger