Prepare a pro forma statement by using assumptions to calcul...

Question

Prepare a pro forma statement by using assumptions to calculatethe ann...

Accepted Answer

Answer 1 Net present value NPV T he NPV of an investment proposal investment project is defined as the sum of the present value of all the cash inflows less the sum of present value of all the cash outflows associated with an investment proposal The investment proposal which is having high annual NPV is generally selected for investment decision Advantages of NPV Method a NPV method recognizes the time value of money b NPV method is based on cash flow rather than accounting profit Disadvantages of NPV method a It required the predetermination of the required rate of return which itself is a difficult job b It does not provide own rate of return It evaluate investment project against the minimum rate of return 2 I nternal rate of return IRR IRR is the discount rate at which the present value of cash inflows and present value of cash outflow is equal In other words IRR is defined as the discount rate which produces zero net present value NPV The investment alternative which has high IRR is generally accepted ie selected for investment opportunity Advantages of IRR a All cash flows are considered in IRR calculation b IRR consider time value of money Disadvantages of IRR a IRR involves tedious calculation b It is assumed in such method IRR that all funds ie cash flows earn rate equals to internal rate of return which is not correct Conflict between NPV and IRR Two investment proposal project may give the conflicting result as per Net present value NPV and Internal rate of return IRR method Such conflict arises in the finance due to any of the following three reasons 1 Time Disparity Short term project have higher IRR whereas Longterm project have higher NPV 2 Size Disparity Project uses high investment have high NPV and project uses low investment have high IRR 3 Reinvestment rate assumption In IRR it is assumed that intermediate cash inflow ....

Prepare a pro-forma statement by using assumptions to calculate the annual operating net cash flow for...

50.1K

Verified Solution

Question

Finance

Answer & Explanation Solved by verified expert

Get Answers to Unlimited Questions

Membership Benefits:

Other questions asked by students