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MGT201 - Financial Management GDB NO.1 Solution and Discussion Fall 2014 Due Date: 14th May, 2014

Graded Discussion Board

Financial Management (MGT201)

Dear Students

This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on 12th May, 2014 for discussion and last date of discussion will be 14th May, 2014.

Topic for Discussion:  

NET PRESENT VALUE (NPV) AND INTERNAL RATE OF RETURN (IRR)

Note:

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Replies to This Discussion

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

??

Net Present Value
Using the company's cost of capital, the net present value (NPV)  is the sum of the discounted cash flows minus the original investment.

Internal Rate of Return 
The internal rate of return (IRR) on a project is the rate of return at which the projects NPV equals zero. At this point, a project's cash flows are equal to the project's costs. Similar to how management must establish a maximum payback period, management must also set what is known as a "hurdle rate", the minimum rate of return a company will accept for a project.

When a project is reviewed with a hurdle rate in mind, the greater the IRR is above the hurdle rate, the greater the NPV, and conversely, the further the IRR is below the hurdle rate, the lower the NPV.

Net present value (NPV) is calculated based on the expected returns and the expected costs of an investment, where these expected returns and expenses are discounted by a rate that reflects inflation and opportunity costs. The process NPV / IRR analysis enables you to determine the net present value of a process. As parameters for this analysis, you can specify initial cost, expected process volume (as an absolute value), number of periods (where each period is one year), and annual discount rate. The analysis then uses the average cost and revenue determined from the process simulation results to calculate the expected future net profits.

In addition to the net present value, this analysis also determines the internal rate of return (IRR) for the process. The internal rate of return is the interest rate received for an investment, based on anticipated expenses and income that will occur at regular periods. IRR is closely related to NPV, the net present value function. The rate of return calculated by IRR is the interest rate corresponding to a zero net present value.

Processes NPV and IRR comparison analysis

Column name Description Calculation
Simulation Result Name The name of the process simulation None
Process Name The name of the simulated process None
Net Present Value (NPV) The net present value of an investment, determined by using a discount rate and a series of future payments (negative values) and income (positive values)
NPV = -  + ()(1-(1+)
-
)
where the annual estimated profit is calculated as ()()
Internal Rate of Return (IRR) The interest rate received for an investment, based on anticipated expenses and income that will occur at regular periods. The rate of return calculated by IRR is the interest rate corresponding to a zero net present value. IRR is defined as the discount rate that will cause the NPV to equal 0 (plus or minus 0.0001). The value of the IRR is solved by treating the NPV to be a function of the discount rate and using the bisection method of numerical analysis to find a value for the IRR between -5000% and 5000%.
Notes This row displays a note if the IRR value cannot be calculated. Messages appear in the following cases:
  • When the payback period is too short to complete a single run through the process
  • When process profit is negative or zero
 
For the Net Present Value and Internal Rate of Return columns, the following comparative information is also displayed:
  • Difference, calculated as: first process value - second process value
  • Percentage Change, calculated as: (Difference / first process value) * 100

Net Present Value is the current value of a future series of payments and receipts and a way to measure the time value of money. Basically, money today is worth more than money tomorrow. And future money is discounted by the interest rate you specify.

Net Present Value Formula

See In very Interesting manners at PPT Slides..

http://www.slideshare.net/craigwbrown/net-present-value-a

http://www.docstoc.com/docs/3390446/net-present-value-definition

Very easy to understand NPV

http://www.mathsisfun.com/money/net-present-value.html

http://www.financeformulas.net/Net_Present_Value.html

http://aafmindia.wordpress.com/2012/07/05/difference-between-npv-ir...

http://accountingexplained.com/managerial/capital-budgeting/npv

Malika Eman thanks for sharing..  

Welcome sir..

tell me that both of the statements are false or not? please mention it. I am really confused. :( :(

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