attached are previouswork same class.
ACC543
Hamza Eweedah
University Of Phoenix
04/28/2023
Introduction
• Investors rely on the internal rate of return and net present valuation to determine the economic benefits of
the target ventures (Arjunan, 2022).
• Donovan Enterprises intends to invest in one of the two projects:
• Project A
•
•
•
Automation machine investment
Useful life of 4 years
Annual cash flows of $126000
• Project B
•
•
•
Employees training
Annual cash flows of $52000
Desired return is 8% for the two projects.
• The NPV is an essential
Net present value
measure of the valuation of a
project (Arjunan, 2022).
• This analysis found that B has
a positive NPV.
• Projects with negative NPVs
are likely to result into losses.
• Project B has a higher NPV
than A.
Project A
Cash flow
PVIF
PV
$
(400,000.00)
1 $
$
126,000.00
0.926 $
$
126,000.00
0.857 $
$
126,000.00
0.794 $
$
126,000.00
0.735 $
NPV
$
Project B
Cash flow PVIF
PV
(400,000.00) -160000
1
-160000
116,676.00
52000 0.926
48152
107,982.00
52000 0.857
44564
100,044.00
52000 0.794
41288
92,610.00
52000 0.735
38220
(51,900.24)
$ 12,224.00
Selected project
• This analysis has revealed that B has a positive NPV.
• The NPV valuation for B imply that the investor will record a profit in four
years.
• The NPV for the two projects is:
• Project A $ (51,900.24)
• Project B $ 12,224.00
• Project A has a higher NPV and therefore, more appealing.
Internal rate of return analysis
• The internal rate of return is a metric for assessing the economic viability of a given
venture (Arjunan, 2022).
• This analysis considers the cash flows for the project in computing the IRR.
• Projects with a positive IRR are viable ventures because they are likely to record
profits.
• These outcomes are significant because:
• They determine the potential viability of a venture
• They outline the possibility of a project to earn profits
Selected project
• Project A has a positive IRR at a rate of 9.931039%.
• Project B has a positive IRR of 3.135267%.
• These observations show that:
• Project B has the capacity to generate profits.
• This project will lead to profits (Dai et al. 2022; Liu, 2022).
• Therefore, project A should be selected.
Preferred method of investment analysis
•
•
•
•
There are various methods that can be used in evaluating the ventures and their potential returns (Dai et al. 2022).
The IRR method
The NPV method
NPV is preferred when:
• Differing discount rates
• Irregular cash flows
• IRR is preferred when:
•
•
No discount rate
Comparing two or more ventures
• Therefore, the IRR is preferred in this project.
The most preferred investment
• In determining the best investment option, it is essential to consider the NPV and IRR
•
•
•
•
•
•
•
outcomes (Dai et al. 2022).
Project A
NPV: $(51,900.24)
IRR: 9.931039%
Project B
NPV: $12,224.00
IRR: 3.135267%
Project A has a higher IRR than B but a lower NPV.
Conclusion
• Investors must predict the viability of their selected ventures before
committing their finances.
• This assessment is achieved through two methods:
• The NPV
• The IRR
• These methods revealed that projects B will lead to profits.
• Donovan should invest in project A since it has a high IRR.
References
• Arjunan, K. (2022). A New Method to Estimate NPV and IRR from the Capital
Amortization Schedule and the Advantages of the New Method. Australasian
Accounting, Business and Finance Journal, 16(6), 23-44.
• Dai, H., Li, N., Wang, Y., & Zhao, X. (2022, March). The Analysis of Three Main
Investment Criteria: NPV IRR and Payback Period. In 2022 7th International
Conference on Financial Innovation and Economic Development (ICFIED 2022) (pp. 185189). Atlantis Press.
• Liu, X. (2022, December). NPV and IRR’s Comparative Analysis in Enterprises
Investment Decision Making. In 2022 2nd International Conference on Financial
Management and Economic Transition (FMET 2022) (pp. 157-165). Atlantis Press.
Project A
Period
Total
Net Present Value and Internal Rate of Return
R
8% Project B
cash flows ($)
Period
cash flows ($)
0
-400000
0
1
126000
1
2
126000
2
3
126000
3
4
126000
4
104000
Rate
-160000
52000
52000
52000
52000
48000
NPV
Project A
$16,044.43
Project B
$11,324.63
IRR
Project A
9.931039%
11.387928%
8% Project A
Cash flow
PVIF
PV
$
(400,000.00)
1 $
$
126,000.00
0.926 $
$
126,000.00
0.857 $
$
126,000.00
0.794 $
$
126,000.00
0.735 $
NPV
IRR
$
Project B
Cash flow PVIF
PV
(400,000.00) -160000
1
116,676.00
52000
0.926
107,982.00
52000
0.857
100,044.00
52000
0.794
92,610.00
52000
0.735
(51,900.24)
1.786344%
-160000
48152
44564
41288
38220
$ 12,224.00
3.135267%
1
Financial Analysis
University Of Phoenix
ACC543
Hamza Eweedah
04/26/2023
2
Financial Analysis
Capital investment decisions can be made more informed by understanding various
analytical techniques that managers can use. These include net present value, internal rate of
return, and the payback method; each has its own strengths and weaknesses, making it fit for the
investor’s specific objectives. In this way, maximum shareholder value is likely to be achieved. A
liquidity ratio can only help in short-term projects, while profitability ratios: helps the firm to
enhance its turnover and profit by meeting customer order fulfillment and operational level.
Managers use three analytical techniques to make capital investment decisions:
Net Present Value (NPV) is a technique used to calculate the present value of future cash
flows while considering the time value of money. NPV offers two key advantages: providing an
absolute dollar amount for the value of the investment and indicating whether the investment is
expected to yield a profit. Despite these benefits, determining future cash flows accurately can be
challenging, and NPV does not factor in the investment size. To illustrate, if a company is
evaluating a project with an initial investment of $40,000 that generates $10,000 in annual cash
flows for five years with a discount rate of 10%, then NPV will compute a figure of $4,023
which means that it is anticipated to be profitable. (McLaney & Atrill, 2017).
Internal Rate of Return (IRR) is a valuable tool when it comes to assessing investments
due to its provision of an exact percentage rate that can be compared to the required rate of
return. It is also beneficial in situations where cash flows are unevenly distributed over time.
However, IRR does come with certain drawbacks; for example, multiple rates may be generated,
making interpretation difficult and the assumption that reinvestment will happen at the same rate
as the IRR itself. To illustrate this concept, imagine a project with an initial investment of
3
$30,000 and year-by-year cash flows of $10,000, $12,000, $8,000, $9,000 and $11,000. Through
calculation via a financial calculator or Excel spreadsheet software, the IRR comes out at 11.8%.
There is a disadvantage to IRR in that it produces multiple rates of return. For example, if
the cash flow for the project in the above example were $10,000, $12,000, -$8,000, $9,000, and
$11,000, respectively, the IRR would produce two possible rates of return, 25% and -14%. This
makes the IRR less helpful in making investment decisions in this case.
Method of payment: (Kubasek, et al. 2020)
The payback method is a capital investment technique for calculating the amount of time
it takes for an investment to recover its initial costThis approach has some benefits, such as being
easy to understand and calculate. Additionally, it prioritizes liquidity, promoting investments
with faster turnaround times. However, on the downside, it needs to consider the time worth of
cash, which may lead to inaccurate outcomes.
The payback method has the advantage of being easy to calculate and understand. This
makes it an ideal tool for small businesses or investors who need more resources to make more
sophisticated capital investments. In addition to emphasizing the importance of liquidity, the
payback method emphasizes investment liquidity. Shorter payback periods make investments
more liquid, so they can be converted to cash if required. ( Drake, 2019).
Overall, financial statement analysis and capital investment techniques are valuable tools
for managers to use when making informed decisions about a company’s future. Financial ratios
are essential for analyzing a company’s financial performance, allowing users to compare
different aspects of the company’s operations. Managers can use these ratios to assess a
company’s liquidity, profitability, and solvency. (Graham & Harvey, 2021)
4
References
Drake, P. (2019). Financial Literacy and Investment Education: A Public Service Approach.
Springer.
Graham, J., & Harvey, C. (2021). The theory and practice of corporate finance: Evidence from
the field. Journal of Financial Economics, 60(2-3), 187-243.
Kubasek, N., Browne, M. N., Herron, D., Dhooge, L., & Barkacs L. (2020). Dynamic business
law (5th ed.). McGraw-Hill Education.
McLaney, E. J., & Atrill, P. (2017). Accounting and finance: An introduction. Pearson Education.
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