Assignment-1 Understanding the Concepts

Apr 30th, 2015
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Strayer University
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Net present value (NPV) and payback rule are both capital budgeting techniques. They are required to evaluate capital budgeting projects so proper wealth-maximizing decisions can be made. They reflect the time value of money since cash outlays for plant and equipment occur now, while the benefits occur in the future.

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Assignment: Understanding the ConceptsTien DaoProf. Thomas Alexander, Ph.D.Strayer University1. Imagine you are a small business owner. Explain how you will apply the concept of NPV / payback rule to make a good financial decision.Net present value (NPV) and payback rule are both capital budgeting techniques. They are required to evaluate capital budgeting projects so proper wealth-maximizing decisions can be made. They reflect the time value of money since cash outlays for plant and equipment occur now, while the benefits occur in the future.The NVP method is considered as the best method to use to evaluate capital budgeting projects. That projects net present value is calculated as the present value of all cash flows for the life of the project less the initial investment or outlay. It considers the time value of money and includes all of the projects cash flow in the analysis. It also measures the projects dollar impact on shareholder wealth. As a small business owner, I will use NVP to have a better evaluation and comparison of the financial impact of different alternatives in a decision-making situation. This helps me to correctly indentify how each alternative would affect the companys revenues and costs, and then I can make my moves to get the best results.The payback period method does not consider the time value of money. It determines the time in years it will take to recover, or pay back, the initial investment in fixed assets. I c

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