Compare and contrast the points you and your classmates made regarding the three methods of ranking capital investment proposals.
Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding the three methods of ranking capital investment proposals. Each response should have a minimum of 100 words
Steven Prsha
Mar 3, 2021 at 10:16 PM
As a financial manager, it is crucial to understand the fundamental capital investment methods outlined in chapter 12. These methods include the payback method, net present value (NPV), and the Internal Rate of Return (IRR). It is important to note that the industry typically uses the latter two, and an analysis using both is typically used when making decisions.
The first method is the payback method is used to \”compute the time required to recoup the initial investment\” (Block et al., 2019). The payback method is easy to calculate but has two drawbacks. The first is it doesn\’t consider the time value of money, and the second fails to account for cash inflows after a specific cutoff period (Block et al., 2019).
The following method is the Net Present Value. NPV allows a business to look at an investment\’s present value, future value, and the discount rate to see if the opportunity will be worth the companies time. Typically, if an investment warrants an NPV greater than zero, it is worth moving forward with the prospect.
The third and final method is known as the Internal Rate of Return. The IRR determines the discount rate that makes the NPV zero. If this calculated rate is greater than the initial discount rate used to calculate NPV, then the investment should be considered acceptable.
References:
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/
Answer preview to compare and contrast the points you and your classmates made regarding the three methods of ranking capital investment proposals.
APA
175 words