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CAPITAL BUDGETING Payback, Discounted Payback, NPV, Profitability Index, IRR and MIRR are all capital budgeting

decision methods. Cash Flow- We are going to assume that the project we are considering approving has the following cash flow. Right now, in year zero we will spend 15,000 dollars on the project. Then for 5 y ears we will get money back as shown below. Year Cash flow 0 1 2 3 4 5 -15,000 +7,000 +6,000 +3,000 +2,000 +1,000

Payback - When exactly do we get our money back, when does our project break even. Figuring this is easy. Take your calculator. Year Cash flow Running Total 0 1 2 3 -15,000 +7,000 +6,000 +3,000 -15,000 -8,000 (so after the 1st year, the project has not yet broken even) -2,000 (so after the 2nd year, the project has not yet broken even) +1,000 (so the project breaks even sometime in the 3rd year)

But when, exactly? Well, at the beginning of the year we had still had a -2,000 balance, right? So do this. Negative Balance / Cash flow from the Break Even Year = When in the final year we break even -2,000 / 3,000 = .666

So we broke even 2/3 of the way through the 3rd year. So the total time required to payback the money we borrowed was 2.66 years. Discounted Payback - is almost the same as payback, but before you figure it, you first discount your cash flows. You reduce the future payments by your cost of capital. Why? Because it is money you will get in the future, and will be less valuable than money today. (See Time Value of Money if you don't understand). For this example, let's say the cost of capital is 10%.

Year Cash flow Discounted Cash flow Running Total 0 1 2 3 4 5 -15,000 7,000 6,000 3,000 2,000 1,000 -15,000 6,363 4,959 2,254 1,366 621 -15,000 -8,637 -3,678 -1,424 -58 563

So we break even sometime in the 5th year. When? Negative Balance / Cash flow from the Break Even Year = When in the final year we break even -58 / 621 = So using the Discounted Payback Method we break even after 4.093 years. Net Present Value (NPV) - Once you understand discounted payback, NPV is so easy! NPV is the final running total number. That's it. In the example above the NPV is 563. That's all. You're done, baby. Basically NPV and Discounted Payback are the same idea, with slightly different answers. Discounted Payback is a period of time, and NPV is the final dollar amount you get by adding all the discounted cash flows together. If the NPV is positive, then approve the project. It shows that you are making more money on the investment than you are spending on your cost of capital. If NPV is negative, then do not approve the project because you are paying more in interest on the borrowed money than you are making from the project. Profitability Index Profitability Index equals NPV divided by Total Investment plus 1 PI = 563 / 15,000 + 1 .093

So in our example, the PI = 1.0375. For every dollar borrowed and invested we get back $1.0375, or one dollar and 3 and one third cents. This profit is above and beyond our cost of capital. Internal Rate of Return - IRR is the amount of profit you get by investing in a certain project. It is a percentage. An IRR of 10% means you make 10% profit per year on the money invested in the project. To determine the IRR, you need your good buddy, the financial calculator. Year Cash flow

0 1 2 3 4 5 Enter these numbers and press these buttons. -15000 g 7000 6000 3000 2000 1000 f g g g g g

-15,000 +7,000 +6,000 +3,000 +2,000 +1,000

CFo CFj CFj CFj CFj CFj

IRR

After you enter these numbers the calculator will entertain you by blinking for a few seconds as it determines the IRR, in this case 12.02%. It's fun, isn't it! Ah, yes, but there are problems.

Sometimes it gets confusing putting all the numbers in, especially if you have alternate between a lot of negative and positive numbers. IRR assumes that the all cash flows from the project are invested back into the project. Sometimes, that simply isn't possible. Let's say you have a sailboat that you give rides on, and you charge people money for it. Well you have a large initial expense (the cost of the boat) but after that, you have almost no expenses, so there is no way to re-invest the money back into the project. Fortunately for you, there is the MIRR.

Modified Internal Rate of Return - MIRR - Is basically the same as the IRR, except it assumes that the revenue (cash flows) from the project are reinvested back into the company, and are compounded by the company's cost of capital, but are not directly invested back into the project from which they came. WHAT? OK, MIRR assumes that the revenue is not invested back into the same project, but is put back into the general "money fund" for the company, where it earns interest. We don't know exactly how much interest it will earn, so we use the company's cost of capital as a good guess.

Why use the Cost of Capital? Because we know the company wouldn't do a project which earned profits below the cost of capital. That would be stupid. The company would lose money. Hopefully the company would do projects which earn much more than the cost of capital, but, to play it safe, we just use the cost of capital instead. (We also use this number because sometimes the cash flows in some years might be negative, and we would need to 'borrow'. That would be done at our cost of capital.)

How to get MIRR - OK, we've got these cash flows coming in, right? The money is going to be invested back into the company, and we assume it will then get at least the company's-cost-ofcapital's interest on it. So we have to figure out the future value (not the present value) of the sum of all the cash flows. This, by the way is called the Terminal Value. Assume, again, that the company's cost of capital is 10%. Here goes... Future Value Cash Flow Times = Note of that years cash flow. 7000 X 6000 X 3000 X 2000 X 1000 X TOTAL (1+.1) 4 = (1+.1) 3 = (1+.1) (1+.1)
2 1

10249 compounded for 4 years 7986 compounded for 3 years 3630 compounded for 2 years 2200 compounded for 1 years 1000 not compounded at all because this is the final cash flow

= =

(1+.1)0 = =

25065 this is the Terminal Value

OK, now get our your financial calculator again. Do this. -15000 g 0 0 0 0 f g g g g IRR CFo CFj CFj CFj CFj CFj

25065 g

Why all those zeros? Because the calculator needs to know how many years go by. But you don't enter the money from the sum of the cash flows until the end, until the last year. Is MIRR kind of weird? Yep. You have to understand that the cash flows are received from the project, and then

get used by the company, and increase because the company makes profit on them, and then, in the end, all that money gets 'credited' back to the project. Anyhow, the final MIRR is 10.81%. Decision Time- Do we approve the project? Well, let's review. Decision Method Result Payback Discounted Payback NPV 4.195 years $500 Approve? Why? well, cause we get our money back because we get our money back, even after discounting our cost of capital. because NPV is positive (reject the project if NPV is negative) cause we make money because the IRR is more than the cost of capital because the MIRR is more than the cost of capital

2.66 years Yes Yes Yes Yes Yes Yes

Profitability Index 1.003 IRR MIRR 12.02% 10.81%

Payback Period Method


Payback is the number of years required to recover the original cash flow outlay investment in a project. The payback is one of the most popular and widely recognized traditional methods of evaluating investment proposals. If the project generates consistent annual cash inflows, the payback period can be computed by dividing cash outlay by the annual cash inflow. That is:

Advantages of Payback
Payback is a popular investment criterion in practice. It is considered to have certain virtues.

Simplicity. The most significant merit of payback is that it is simple to understand and easy to calculate. The business executives consider the simplicity of method as a virtue. This is evident from their heavy reliance on it for appraising investment proposals in practice.

Cost effective. Payback method costs less than most of the sophisticated techniques that require a lot of the analysts time and the use of computers. Short term effect. An investor can have more favorable short term effects on earnings per share by setting up a shorter standard payback period. It should, however, be remembered that this may not be a wise long term policy as the investor may have to sacrifice its future growth for current earnings. Risk shield. The risk of the project can be talked by having a shorter standard payback period as it may ensure guarantee against loss. An investor has to invest in many projects where the cash inflows are and life expectancies are highly uncertain. Under such circumstances, payback may become important, not as much as a measure of profitability but as a means of establishing an upper bound on the acceptable degree of risk. Liquidity. The emphasis in payback is on the early recovery of the investment. Thus, it gives an insight into the liquidity of the project. The funds so released can be put to other uses.

Payback = Initial investment / Annual Cash inflow Acceptance Rule Many firms use the payback period as an investment evaluation criterion and method of ranking projects. They compare the projects payback with a predetermined, standard payback. The project would be accepted if its payback period is less than the maximum or standard payback period set by management. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest ranking to the project with highest payback period. Thus, if the firm has to choose between two mutually exclusive projects, the project with shorter payback period will be selected.

Profitability Index - Measure Investment Return

by James Kobzeff
Profitability index is an investment return measurement much like net present value (NPV), with one notable difference. NPV finds the dollar amount difference between the sum of present values (PV) of all future cash flows and the amount of initial investment. Profitability index finds the ratio. For example, let's say the present worth of all future cash flows exactly equals your initial investment. The NPV would be zero (because there is no dollar amount difference) whereas the profitability index would be 1.0 (because there is no proportionate difference).

How to Calculate
Profitability Index = Present Value of all Future Cash Flows / Initial Cash Investment

Profitability Index vs Net Present Value


The advantage of using profitability index to measure investment opportunities is that it allows you to compare two real estate investment opportunities that require different initial investments. Primarily because profitability index is not sensitive to the amount of the investment. As a ratio, profitability index allows you to measure the proportion of dollars returned to dollars invested, and therefore allows you to easily compare PV and initial investment on any number of investment opportunities.

How to Apply
PROPERTY A. Requires a cash investment of $150,000 and you estimate the PV of all its future cash flows at $160,000. Calculate profitability index by dividing the PV of future cash flows ($160,000) by your initial cash investment ($150,000). The index is 1.070. PROPERTY B. Requires a cash investment of $90,000 and you estimate the PV of all its future cash flows at $99,000. Calculate profitability index by dividing the PV of future cash flows ($99,000) by your initial cash investment ($90,000). The index is 1.10. Okay, which is the better deal? Remember profitability index measures the ratio between cash flow to investment. Therefore, the higher the ratio the more cash flow to investment. So in this case the profitability index reveals that Property B is more profitable than Property A. Here's a quick way to see whether or not you meet you meet your investment goal with profitability index.

A profitability index of 1.0 means you have exactly achieved your desired rate of return (i.e., the price you need to pay for the property based upon its future cash flows discounted at your rate of return is exactly right). An index greater than 1.0 means that you've exceeded your goal. An index less than 1.0 means that you failed to achieve your goal. Simply put. To meet your investment goal, always be sure the profitability index is 1.0 or better.

Profitability Index
Profitability index is the ration of the present value of cash inflows, at the required rate of return, to the initial cash outflow of the investment. Profitability index is another time adjusted method of evaluating the investment proposals is the benefit-cost (B/C) ratio or profitability index (PI).

PI = Present value of cash inflows/ Initial cash outflow


Acceptance Rule The following are the profitability index (PI) acceptance rules:

Accept the project when profitability index is grater than one Rejected the project when profitability index is less than one May accept the project when profitability index equal one

The project with positive net present value will have profitability index grater than one. Profitability index less than one means that the projects net present value is negative Evaluation of profitability index (PI) method Profitability index (PI) is a conceptually sound method of appraising investment projects. It is a variation of the net present value (NPV)

method, and requires the same computations as the net present value (NPV) method.

Time value. It recognizes the time value of money. Value maximization. It is consistent with the shareholder value maximization principle. A project with profitability index grater than one will have positive net present value (NPV) and if accepted, it will increase shareholders wealth. Relative profitability. In the profitability index (PI) method, since the present value of cash inflows is divided by the initial cash outflow, it is a relative measure of a projects profitability.

Like the net present value (NPV) method, this criterion also requires calculation of cash flows and estimate of the discount rate. In practice, estimation of cash flows and discount rate pose problems.

Evaluation of Internal Rate of Return Method


Internal rate of return (IRR) method is like the net present value (NPV). It is a popular investment criterion since it measures profitability as a percentage and can be easily compared with the opportunity cost of capital. Internal rate of return (IRR) method has following merits:

Time value. The internal rate of return (IRR) method recognizes the time value of money. Profitability measure. It considers all cash flows occurring over the entire life of the project to calculate its rate or return. Acceptance rule. It generally gives the same acceptance rule as the net present value (NPV) method. Shareholder value. It is consistent with the shareholders wealth maximization objective. Whenever a projects internal rate of return (IRR) is grater than the opportunity cost of capital, the shareholders wealth will be enhance.

Here is the briefly mention the problems that internal rate of return (IRR) method may suffer from.

Multiple rates. A project may have multiple rates, or it may not have a unique rate of return. These problems arise because of the mathematics of internal rate of return (IRR) computation. Mutually exclusive projects. It may also fail to indicate a correct choice between mutually exclusive projects under certain situations. Value additively. Unlike in the case of the net present value (NPV) method, the value additively principle does not hold when the internal rate of return (IRR) method is used internal rate of returns (IRRs) of projects do not add. Thus, for projects A and B, IRR (A) + IRR (B) need not be equal to IRR (A+B).

Internal Rate of Return (IRR)


The internal rate of return (IRR) is the rate that equates the investment outlay with the present value of cash inflow received after one period. This also implied that the rate of return is the discount rate which makes net present value (NPV) =0. There is no satisfactory way of defining the true rate of return of a long term asset. Internal rate of return (IRR) is the best available concept. We shall see that although it is very frequently used concept in finance, yet at times it can be a misleading measure of investment worth. The internal rate of return (IRR) method is another discounted cash flow method for investment appraisal, which takes account of the magnitude and timing of cash flows. Other terms used to describe the internal rate of return (IRR) method are yield on an investment, marginally efficiency of capital, rate of return over cost, time adjusted rate of internal return and so on.

Limitations of Net Present Value

The net present value (NPV) method is a theoretically sound method. In practice, it may pose some computation problems.

Cash flow estimation. The net present value (NPV) method is easy to use if fore casted cash flows are known. In practice, it is quite difficult to obtain the estimates of cash flows due to uncertainty. Discount rate. It is also difficult in practice to precisely measure the discount rate. Mutually exclusive projects. Further, caution needs to be applied in using the net present value (NPV) method when alternative projects with unequal lives, or under funds constraint are evaluated. The net present value (NPV) rule may not give unambiguous results in these situations. Ranking of projects. It should be noted that the ranking of investment projects as per the net present value (NPV) rule is not independent of the discount rates.

Importance of the Net Present Value (NPV)


Net present value (NPV) is the true measure of an investments profitability. It provides the most acceptable investment rule for the following reasons:

Time value. It recognizes the time value of money-a $


received today is worth more than a $ received tomorrow.

Measure of true profitability. It uses all


cash flows occurring over the entire life of the project in calculating its worth. Hence, it is a measure of the projects true profitability. The net present value method relies on estimated cash flows and the discount rate rather than any arbitrary assumptions, or subjective considerations.

Value additively. The discounting process facilitates


measuring cash flows in terms of present values that is in terms of

equivalent, current $. Therefore, the net present values of projects can be added. For example, NPV (A+B) =NPV (A) +NPV (B). This is called the value additively principle. It implies that if we know the net present values (NPV) of individual projects, the value of the firm will increases by the sum of their net present values (NPVs). We can also say that if we know values of individual assets, the firms value can simply be found by adding their values. The value additively is an important property of an investment criterion because it means that each project can be evaluated, independent of others, on its own merit.

Shareholder value. The net present value (NPV)


method is always consistent with the objective of the shareholder value maximization. This is the greatest virtue of the method.

Net Present Value Method (NPV)


The net present value (NPV) method is the classic economic method of evaluating the investment proposals. It is discounted cash flow technique that explicitly recognizes the tine value of money. It correctly postulates that cash flows arising at different time periods differ in value and are comparable only when their equivalents present values are found out. The following steps involved in the calculation net present value (NPV):

Cash flows of the investment project should be forecast ed based on realistic assumptions. Appropriate discount rate should be identified to discount the forecast ed cash flows. The appropriate discount rate is the projects opportunity cost of capital, which is equal to the required rate of return expected by investors on investments of equivalent risk. Present value of cash flows should be calculated using the opportunity cost of capital as the discount rate. Net present value (NPV) should be found out by subtracting present value of cash outflows from present value of cash inflows. The project should be accepted if net present value (NPV) is positive.

Project acceptance rule using net present value It should be clear that the acceptance rule using the net present value (NPV) method is to accept the investment project if its net present value (NPV) is positive and to reject it if the net present value (NPV) is negative. Positive net present value (NPV) contributes to the net wealth of the shareholders, which should result in the increased price of a firms share. The positive net present value (NPV) will result only if the project generates cash inflows at a rate higher than the opportunity cost of capital. A project with zero net present value (NPV) may be accepted. A zero net present value (NPV) implies that project generates cash flow at a rate just equal to the opportunity cost of capital. The net present value (NPV) acceptance rules are:

Accept the project net present value (NPV) is positive Reject the project net present value (NPV) is negative May accept the project when net present (NPV) is zero

The net present value (NPV) can be used to select between mutually exclusive projects; the one with the higher net present value (NPV) should be selected. Using the net present value (NPV) method, projects would be ranked in order of net present values; that is, first rank will be given to the project with higher positive net present value (NPV) and so on.

Investment Appraisal Criteria


A number of investment appraisal criteria or capital budgeting techniques are in use of practice. They may be grouped in the following two categories:
1.

Discounted cash flow criteria


Net present value (NPV)

Internal rate of return (IRR) Profitability index (PI)


2.

Non discounted cash flow criteria


Payback

period Accounting rate of return Discounted payback period Discounted payback is a variation of the payback method. It involves discounted cash flows, but it is not a true measure of investment profitability. We will show in our following posts the net present value (NPV) criterion is the most valid technique of evaluating an investment project. It is consistent with the objective of maximizing the shareholders wealth.

Investment Appraisal Criteria


A number of investment appraisal criteria or capital budgeting techniques are in use of practice. They may be grouped in the following two categories:
1.

Discounted cash flow criteria


Net present value (NPV) Internal rate of return (IRR) Profitability index (PI)

2.

Non discounted cash flow criteria


Payback

period Accounting rate of return Discounted payback period Discounted payback is a variation of the payback method. It involves discounted cash flows, but it is not a true measure of investment profitability. We will show in our following posts the net present value (NPV) criterion is the most valid technique of evaluating an investment

project. It is consistent with the objective of maximizing the shareholders wealth.

Payback Period
At first glance, payback is a simple investment appraisal technique, but it can quickly become complex.

What It Measures
How long it will take to earn back the money invested in a project.

Why It Is Important
The straight payback period method is the simplest way of determining the investment potential of a major project. Expressed in time, it tells a management how many months or years it will take to recover the original cash cost of the projectalways a vital consideration, and especially so for managements evaluating several projects at once. This evaluation becomes even more important if it includes an examination of what the present value of future revenues will be. Back to top

How It Works in Practice


The straight payback period formula is: Payback period = Cost of project Annual cash revenues Thus, if a project costs $100,000 and is expected to generate $28,000 annually, the payback period would be: 100,000 28,000 = 3.57 years If the revenues generated by the project are expected to vary from year to year, add the revenues expected for each succeeding year until you arrive at the total cost of the project. For example, say the revenues expected to be generated by the $100,000 project are: Year Revenue Total

1 2 3 4 5

$19,000 $25,000 $30,000 $30,000 $30,000

$19,000 $44,000 $74,000 $104,000 $134,000

Thus, the project would be fully paid for in year 4, since it is in that year that the total revenue reaches the initial cost of $100,000. The picture becomes complex when the time value of money principle is introduced into the calculations. Some experts insist this is essential to determine the most accurate payback period. Accordingly, present value tables or computers (now the norm) must be used, and the annual revenues have to be discounted by the applicable interest rate, 10% in this example. Doing so produces significantly different results: Year 1 2 3 4 5 Revenue Present value Total $19,000 $17,271 $17,271 $25,000 $20,650 $37,921 $30,000 $22,530 $60,451 $30,000 $20,490 $80,941 $30,000 $18,630 $99,571

This method shows that payback would not occur even after five years. Back to top

Tricks of the Trade


Clearly, a main defect of the straight payback period method is that it ignores the time value of money principle, which, in turn, can produce unrealistic expectations. A second drawback is that it ignores any benefits generated after the payback period, and thus a project that would return $1 million after, say, six years might be ranked lower than a project with a three-year payback that returns only $100,000 thereafter. Another alternative to calculating by payback period is to develop an internal rate of return. Under most analyses, projects with shorter payback periods rank higher than those with longer paybacks, even if the latter promise higher returns. Longer paybacks can be affected by such factors as market changes, changes in interest rates, and economic shifts. Shorter cash paybacks also enable companies to recoup an investment sooner and put it to work elsewhere. Generally, a payback period of three years or less is desirable; if a projects payback period is less than a year, some contend it should be judged essential.

The internal rate of return (IRR) is frequently used by corporations to compare and decide between capital projects, but it can also help you evaluate certain financial events in your own

life, like lotteries and investments. The IRR is the interest rate (also known as the discount rate) that will bring a series of cash flows (positive and negative) to a net present value (NPV) of zero (or to the current value of cash invested). Using IRR to obtain net present value is known as the discounted cash flow method of financial analysis. Read on to learn more about how this method is used. (For more insight, read the Discounted Cash Flow Analysis tutorial.) IRR Uses As we mentioned above, one of the uses of IRR is by corporations that wish to compare capital projects. For example, a corporation will evaluate an investment in a new plant versus an extension of an existing plant based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital. Once this hurdle is surpassed, the project with the highest IRR would be the wiser investment, all other things being equal (including risk). IRR is also useful for corporations in evaluating stock buyback programs. Clearly, if a company allocates a substantial amount to a stock buyback, the analysis must show that the company's own stock is a better investment (has a higher IRR) than any other use of the funds for other capital projects, or than any acquisition candidate at current market prices. (For more insight on this process, read A Breakdown Of Stock Buybacks.) Calculation Complexities The IRR formula can be very complex depending on the timing and variances in cash flow amounts. Without a computer or financial calculator, IRR can only be computed by trial and error. One of the disadvantages of using IRR is that all cash flows are assumed to be reinvested at the same discount rate, although in the real world these rates will fluctuate, particularly with longer term projects. IRR can be useful, however, when comparing projects of equal risk, rather than as a fixed return projection. Calculating IRR The simplest example of computing an IRR is by using the example of a mortgage with even payments. Assume an initial mortgage amount of $200,000 and monthly payments of $1,050 for 30 years. The IRR (or implied interest rate) on this loan annually is 4.8%. Because the a stream of payments is equal and spaced at even intervals, an alternative approach is to discount these payments at a 4.8% interest rate, which will produce a net present value of $200,000. Alternatively, if the payments are raised to, say $1,100, the IRR of that loan will rise to 5.2%. The formula for IRR, using this example, is as follows:

Where the initial payment (CF1) is $200,000 (a positive inflow) Subsequent cash flows (CF 2, CF 3, CF N) are negative $1050 (negative because it is being paid out) Number of payments (N) is 30 years times 12 = 360 monthly payments

Initial Investment is $200,000 IRR is 4.8% divided by 12 (to equate to monthly payments) = 0.400%

Figure 1: The formula for calculating internal rate of return (IRR) Power of Compounding IRR is also useful in demonstrating the power of compounding. For example, if you invest $50 every month in the stock market over a 10-year period, that money would turn into $7,764 at the end of the 10 years with a 5% IRR, which is approximately the current Treasury (risk-free) rate. In other words, to get a future value of $7,764 with monthly payments of $50 per month for 10 years, the IRR that will bring that flow of payments to a net present value of zero is 5%. Compare this investment strategy to investing a lump-sum amount: to get the same future value of $7,764 with an IRR of 5%, you would have to invest $4,714 today, in contrast to the $6,000 invested in the $50-per-month plan. So, one way of comparing lump-sum investments versus payments over time is to use the IRR. Other IRR Uses IRR analysis can be useful in dozens of ways. For example, when the lottery amounts are announced, did you know that a $100 million pot is not actually $100 million? It is a series of payments that will eventually lead to a payout of $100 million, but does not equate to a net present value of $100 million. In some cases, advertised payouts or prizes are simply a total of $100 million over a number of years, with no assumed discount rate. In almost all cases where a prize winner is given an option of a lump-sum payment versus payments over a long period of time, the lump-sum payment will be the better alternative. (To learn more about this, read Understanding The Time Value Of Money.) Another common use of IRR is in the computation of portfolio, mutual fund or individual stock returns. In most cases, the advertised return will include the assumption that any cash dividends are reinvested in the portfolio or stock. Therefore, it is important to scrutinize the assumptions

when comparing returns of various investments. What if you don't want to reinvest dividends, but need them as income when paid? And if dividends are not assumed to be reinvested, are they paid out or are they left in cash? What is the assumed return on the cash? IRR and other assumptions are particularly important on instruments like whole life insurance policies and annuities, where the cash flows can become complex. Recognizing the differences in the assumptions is the only way to compare products accurately. Conclusion As the number of trading methodologies, mutual funds, alternative investment plans and stocks has been increasing exponentially over the last few years, it is important to be aware of IRR and how the assumed discount rate can alter results, sometimes dramatically. Many accounting software programs now include an IRR calculator, as do Excel and other programs. A handy alternative for some is the good old HP 12c financial calculator, which will fit in a pocket or briefcase. (Check out the Investopedia Calculators.) Read more: http://www.investopedia.com/articles/07/internal_rate_return.asp#ixzz1PULWsUMM

Calculating of the net present value.


The net present value is also called "fair value" or "time value".
Online calculator for the computation of the net present value (NPV) of a pending row of payments and yields. Basically, the NPV is the value of a security, contract or goods at the present time. This method is also used to estimate the value of companies and is then called the DCF-method. DCF stands for Discounted Cash Flows. Here, the amount of the discount for a payment depends on the comparison interest rate and the date of the payment. For investments, the net present value is an important indicator. Only investments that offer you a positive net present value are considered to be worthy to pursue. *but the cash flows are not only the disbursements or dividends a company generates.

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