Response to Comments - Essay Example

DQ1 The compounding concept is something regular people might not understand well, but is a concept that is relevant to all investors. In reality the concept of compounding is a finance concept that everyone should understand. Compounding affects the financial decisions of everyday people. Banks charge people an interest rate on their mortgage payment that is associated with the APR that banks can offer to clients. During the first years of loans clients pay more interest than principal on their payments.

This is all due to the compounding concept because this financial law states that the money you pay now is worth less in the future. All accountants and financial analysts realize that money losses value over time due to inflation. Back in the 1960’s the money these people had was worth twice as much as today’s money because our elders had greater buying power due to the fact money had not depreciated like it has in today’ economy. DQ2 When a company is using the NVP value method a firm should only accept a project if the project has a NPV above cero.

In your response I believe you mentioned that a company could do badly irrelevant of the NPV being above cero. Well this could happen because the NPV analysis is limited to the project that the analysis is evaluating. If a firm has financial troubles that existed irrelevant of the results associated with the NPV of a project then a firm could go down under. The NPV analysis is not a tool that can be used to evaluate the overall standing of a firm. The scope of an NPV analysis is limited to the scope of the project that the financial tool is used for (Besley & Brigham, 2000).

The NPV tool can help managers determine the viability of a capital project. References Besley, S., Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Fort Forth: The Dryden Press.