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Statistics and Quantitative Methods - Assignment Example

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The "Statistics and Quantitative Methods" paper examine investment appraisal methods, calculates payback period, NPV, IRR, and Net Terminal Value, describes the Payback Period, Net Present Value, Internal Rate of Return, Net Terminal Value, and product-moment coefficient of correlation…
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Download file to see previous pages The method is also not sensitive to variation in the value of money over time. However, it is easy to use and can be used to make a quick assessment of investment viability using existing data (Groppelli & Nikbakht, 2006: pp. 157-158).

Net present value (NPV) takes into account the value of money over time and uses the present value of future cash flows (Lasher, 2008: p. 426). This present value is compared with the initial investment and decision taken on whether the investment is viable over the long term or not. NPV is, therefore, a difference between the present value and the initial investment. If NPV is positive, the project is viable, and if it is negative, the project may be rejected. NPV uses the discount rate to calculate the present value from future projected cash flows. The accuracy of NPV is directly related to the appropriate discount rate selected. Other than having the advantage of being sensitive to the value of money over time, NPV uses “cash flows rather than net earnings” (Groppelli & Nikbakht, 2006: pp. 160) which is in line with modern financial theory. One of the ways inaccuracies can creep into NPV calculations is when management is not able to predict future cash flows accurately.

The internal rate of return (IRR) is the discount rate at which the net present value of all investments would become zero. It follows that the higher the IRR, the better its viability and growth prospects. IRR gives a good indication of the rate of profitability and firms usually decide on a cut-off value below which they reject projects as having lesser returns than expected (Heisinger, 2010: p. 372). Some of the issues associated with IRR include the fact that the method can sometimes generate rates that may be unrealistic. These must be reviewed with close scrutiny as a rate much higher than the cutoff rate indicates that the firm can reinvest cash flows at that rate. ...Download file to see next pagesRead More
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