The Compounding Effect in Financing, the NPV Value Technique - Assignment Example

Add to wishlist

Summary

The paper 'The Compounding Effect in Financing, the NPV Value Technique " highlights that the NPV value technique is often used by managers when making decisions regarding capital projects. A project should only be accepted if its NPV is above cero (Garrison & Noreen, 2003). …

Download full paper File format: .doc, available for editing

GRAB THE BEST PAPER94.7% of users find it useful

The Compounding Effect in Financing, the NPV Value Technique

Read Text Preview

Subject: Finance & Accounting
Type: Assignment
Level: Masters
Pages: 1 (250 words)
Downloads: 2
Author: ernesthuels

Extract of sample "The Compounding Effect in Financing, the NPV Value Technique"

DQ1 The compounding effect is one of the oldest concepts in the financial world. Compounding is a powerful concept because it allows for the creation of money. Compounding works in the following manner. If you put $1000 in a bank account paying 5% the money will grow by 5% after one year and the following year the account will increase by 5% of the principal plus the interest accumulated which would be 5% of $1050 and so on. Compounding has a reverse effect which is referred to as discounting.

Discounting is used to determine the time value of money of a fixed amount of money or expected cash flow; for instance, if a person has $500 that money will be worthless in the future because money depreciates due to the effect of inflation. Based on the time value of money present value table $500 discounted at 3% will be worth $431.30 five years from now (Besley & Brigham, 2000). DQ2 The way to calculate the present value of the amount of money is by using financial calculators. Graphic calculators such as the Ti-89 titanium have integrated financial calculators in its systems which are very easy to use.

The discounting rate a company uses depends on the risk the company is willing to take. Some companies require a higher discounting rate than others due to the industry in which they operate.

Cite this document

APA
MLA
CHICAGO

(The Compounding Effect in Financing, the NPV Value Technique Assignment - 1, n.d.)
The Compounding Effect in Financing, the NPV Value Technique Assignment - 1. Retrieved from https://studentshare.org/finance-accounting/1578123-concept-of-compounding-dq2-positive-npv

(The Compounding Effect in Financing, the NPV Value Technique Assignment - 1)
The Compounding Effect in Financing, the NPV Value Technique Assignment - 1. https://studentshare.org/finance-accounting/1578123-concept-of-compounding-dq2-positive-npv.

“The Compounding Effect in Financing, the NPV Value Technique Assignment - 1”, n.d. https://studentshare.org/finance-accounting/1578123-concept-of-compounding-dq2-positive-npv.

Cited: 0 times

CHECK THESE SAMPLES OF The Compounding Effect in Financing, the NPV Value Technique

The Relationship and Usefulness of Time, Cost and Quality behind the Success of Project

This paper aims to critically evaluate the relationship and usefulness of time, cost and quality behind the success of a project.... The author states that the Critical Path Method helps the project manager to schedule the time required for the project.... hellip; Projects are initiated by the organization in response to some requests that could not be executed in the normal operational limits of the organization (Woodward, 1997)....

8 Pages (2000 words) Coursework

Guildford Site Development Appraisal

Availing of one especially in financing construction projects is widely practiced.... As a rule of thumb, the long-term interest rate should be lower as these represent a broader time period for compounding to accrue.... The writer of this assignment intends to conduct an in-depth investigation of the commercial activity as well as income along with outcome analysis in a particular organization....

12 Pages (3000 words) Essay

The Methods of Capital Project Evaluation

The methods of capital project evaluation vary from payback to the internal rate of return to the net present value.... The methods of capital project evaluation vary from payback to the internal rate of return to the net present value.... In this context, opportunity cost is the value of the most valuable alternative that is often given up if any proposed investment project is to be undertaken.... … One difficulty that arises from the use of a method such as npv is the possibility of compounding a risk premium that is in the business....

2 Pages (500 words) Essay

FIN 300 - Principles of Finance for the Private Sector 1-8

Residual value estimated is normally the amount that can be realized if the asset was to be sold after its useful life.... However, most organizations take the estimated residual value to be zero.... Present value is the current value of a given future value of money or cash flow streams (Chiu2010).... Compounding is process of finding the future value when the present value is given while discounting if the process of finding the present value when the future value is given....

4 Pages (1000 words) Essay

Net Present Value Model (NPV)

The project selected should be the one with the highest npv value.... uestion #3 The capital budgeting evaluation technique that I prefer is net present value.... This technique allows a manager to select the best project among several options.... An advantage of this method is that it is… A con of the payback period is that it does not take into consideration the time value of money.... The net present value calculates the present value of future cash flows of a project....

1 Pages (250 words) Coursework

Business Project Valuation

hellip; The author of the paper explains that Discounted Cash Flow Analysis (DCF) is a valuation technique whereby a the evaluator makes use of the Net Current Value (NCV) and then compounding it at a rate considering various factors and then seeing the possible future value of the company.... This paper “Business Project Valuation” delves in the discussion of the various valuation techniques that are used in the determination of the value that is yield by the three companies that will be used for the case study....

6 Pages (1500 words) Assignment

Corporate Financial Management

nbsp; Before any of the capital budgeting techniques could be employed, there is a need to define the incremental operating cash flows per plan for the net present value (NPV), internal rate of return (IRR), and payback period methods.... The author evaluates the plans using four alternative capital budgeting techniques, ranks the plans accordingly and critically discusses the results and the applied methodology....

12 Pages (3000 words) Assignment

Project Appraisal Techniques and Decision Making

The author critically evaluates a technique used by organizations for decision-making or performance management purposes.... hellip; The project appraisal techniques use ratios except for the net present value while cost-benefit techniques use purely absolute monetary value.... They include payback period tools and the net present value method.... The first decision-making tool is the net present value.... Net present value is a capital budgeting decision method used to select independent projects for business or non- business entities....

11 Pages (2750 words) Term Paper