Resonse to comment W4CT and CE - Essay Example

DQ1 The payback period technique is a very popular technique that managers use to evaluate capital projects due to its simpli The payback period metric provides managers with an accurate estimate of how many years it will take for the company to breakeven on its investment. One of the weaknesses of the technique is that it does not take into consideration the time value of money concept (Besley & Brigham, 2000). The technique is very straight up, but despite its cons it has practical applications because based on this technique a company can determine how long it will take a project to begin to generate revenues.

The payback period gives the manager the amount of year it takes to break even. The payback method allows managers to assess a capital project quickly and make operating decisions based on the results. If the payback period is longer than what the company can afford then the project must be rejected. The reason a manager should accept a project with above an above cero NPV is because the metric ensures that the firm will generate money taking into considerations the time value of money. As you mentioned in your response the use of the NPV method lowers the risk of managers of accepting projects that could be unprofitable.

The great thing about using the NPV method to evaluate projects is that this method provides results that are unbiased due to the fact that the NPV mathematical methodology is flawless. If the NPV results states that a project has a negative NPV results this is undeniable prove that the project will not bring a company any benefits. If a manager does not use any proven capital budgeting techniques such as NPV the manager is being irresponsible and his work as a manager can be considered irresponsible and incompetent.

DQ2 Managers must use financial capital budget techniques to evaluate whether to accept or reject a project. Two of the most useful and accurate techniques at evaluating the types of revenues and net cash flows that a project will generate are the NPV and IRR techniques. Both techniques take into consideration the time value of money concept (Besley & Brigham, 2000). This is very important because the time value of money determines the net cash flow a firm will receive after discounting inflation considerations.

Corporations are presented with many opportunities to grow and make money either internally or externally. These projects have to be evaluated to determine the project that makes the most sense for the company. If a manager does not apply financial models such as NPV, IRR, or payback there is no way for a manager to differentiate among several projects. When using the NPV technique it is imperative for a manager to select the NPV results that provides a value above cero. All negative NPV values for a project must be discarded.

The best option when choosing among several projects is the project that gives the highest NPV value. The project with the highest NPV value will generate the most money for the company in the long run. In my opinion the only reason that a manager would choose a project that has a lower NPV value that another project being considered assuming that both projects have positive NPV values is if there are hidden business risks that could affect the financial outcome of the project. For instance if there is a pending regulation or law that is being discussed in congress that if approved it might raise the cost of the project that has the higher NPV a manager might consider that possibility as a fact and as a consequence the project with the second best NPV would be the best solution.

References Besley, S., Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Fort Forth: The Dryden Press.