Estimating net present values for investments can be a problem because companies value investments
Capital Budgeting Problems [LO1] (Student Response)
Estimating net present values for investments can be a problem because companies value investments by discounting the future cash flows. This means they can project some numbers that may come in way less than they expect which would make the investment create a loss for the company. If the value of an investment exceeds the amount it cost to start it of then it could be the wrong investment. If the net present value is positive the investment should move forward but if the projection ends negative it will be a loss. Using the cash flow and known discount rate allows calculations for and investment to be shown accurately. The payback period seems to be easy to implement because the date will be understood between both parties involved. What can make this difficult is if the person who is supposed to pay back money has issues with paying the money back. This can affect the lender or put the lender in the negative with other accounts.
#8 acceptance and rejections (Student Post)
Using net present values we have to consider the upper and lower bounds while keeping in mind that the actual values can be out of those ranges. NPV accounts for depreciation and the increase of money from the investment If the investment decreases money instead of increase cash flow it will more than likely be rejected. Implying that future money will not have the same value as the present money. Analyzing the present value of cash flow will allow the comparison of what future investments will make for the company. When the cost to start is more than the profit that will be made from the investment a company would more than likely reject to move forward with that investment.
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Estimation of the NPV (net present value) for projects can pose a challenge since firms value projects by assigning discounts to future cash-flows. This implies that they are able to estimate several numbers that might be less than expected, hence creating losses in the investment. If an investment’s value is more than its cost at the beginning…………………………………….
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