Time Value of Money Calculations Assignment Example | Topics and Well Written Essays - 750 words

Time Value of Money Calculations - assignment ExampleCapital budgeting decisions are based on an evaluation of the cash flows expected from investing in a specific project (Emery et al 2007). Projects are evaluated using methods such as net chip in value (NPV), internal rate of return (IRR), payback menstruum (described as round-eyed payback) and usher outed payback period. These methods skunk assist management in deciding which project among a set of options yields the best return or whether a particular project should be undertaken.The NPV is the net balance of the initial investment after deducting future tense cash flows at present values. The implication of a negative NPV indicates the failure of the project to generate complete funds to pay up the initial investments as well as to facilitate some returns to shareholders. culture contained in the Appendix indicates that the project has a overconfident NPV of $16,692. This implies that the project would be beneficial to the organizationThe IRR is the discount rate that equates the present value of a projects cash flows with the cost of the project (Brigham and Ehrhardt 2005). This occurs when NPV is qualified to Zero (0). If used appropriately it is a valuable tool in the selection of projects (Hazen 2003). The IRR of the Server modify project is 10.13 per cent. This is 2.13 per cent above the organizations cost of capital and therefore bump offers a positive return to shareholders. See Appendix 1 for the solution.According to Brigham and Ehrhardt (2005) the simple payback period indicates the time period over which the project recovers the initial investment. In performing the calculations the annual cash flows are set off against the initial outflow until there is a positive balance. Investments with long payback periods are considered to be groundless compared to those with relatively short payback periods and so this method has a bias for short term projects. Additionally, the simple payba ck method does not take into account the time value of money since it