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Investment appraisal
Linking the Fisher Effect to Future Cash Flow Discounting
How does the Fisher Effect relate to the concept of "discounting" future cash flows?
Examine the connection between the Fisher Effect and the practice of discounting future cash flows, illustrating its role in investment valuation and decision-making.
Tags : Fisher Effect , Cash Flow Discounting , Investment AppraisalExploring Methods Employed in Capital Budgeting
What are the methods used in capital budgeting?
Methods in capital budgeting include Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Profitability Index, and the Accounting Rate of Return. Each method offers a different perspective on investment viability, aiding in decision-making processes.
Tags : Capital Budgeting Methods , Investment Appraisal , Financial EvaluationUnderstanding Net Present Value in Investment Evaluation
Can you explain the concept of net present value (NPV) in capital budgeting?
Net Present Value (NPV) calculates the present value of expected future cash flows from an investment, discounted at the cost of capital. A positive NPV indicates that the project's expected returns exceed the initial investment, making it financially viable.
Tags : Net Present Value (NPV) , Capital Budgeting , Investment AppraisalCalculating Internal Rate of Return for Investment Assessment
How is the internal rate of return (IRR) calculated in capital budgeting?
The Internal Rate of Return (IRR) represents the discount rate where the net present value (NPV) of an investment becomes zero. It's computed iteratively, finding the rate that equates the present value of cash inflows to the initial investment outlay.
Tags : Internal Rate of Return (IRR) , Capital Budgeting , Investment AppraisalEvaluating Future Cash Flows: DCF in Capital Budgeting
Can you explain the concept of discounted cash flow (DCF) in capital budgeting?
DCF involves estimating the present value of future cash flows by discounting them using a predetermined rate. It aids in evaluating the attractiveness of an investment by considering the time value of money, providing insights into its potential profitability.
Tags : Discounted Cash Flow , Capital Budgeting , Investment AppraisalLimitations of ARR in Investment Appraisal
What are the limitations of using the accounting rate of return (ARR) in capital budgeting?
ARR relies on accounting profits and doesn't consider the time value of money, leading to potential inaccuracies in investment appraisal. It may disregard cash flow timing and project duration, impacting the quality of investment decisions.
Tags : Accounting Rate of Return , Limitations , Investment Appraisal