Finance discussion

Financediscussion

TheNPV method is used to evaluate the desirability of a given investmentproject. On the other hand, the cost of capital refers to the minimumdesired rate of return. The difference between the present value ofexpected cash inflow and the present value of expected cash outflowsgives the net present value. The Net present value is less than zerowhen the value of expected cash outflows is greater than the value ofexpected cash inflows and in such a case less than enough cash flowis generated. On the other hand, a positive NPV means that theproject will generate more than enough cash flow while an NPV valueequals to zero means that exactly enough cash flow would be obtainedfrom the project. For long term and short term projects, there existdifferences in the number of cash flows. Under NPV, short termprojects are ranked higher when the capital cost is high because insuch a case the NPV is greater than zero. A project is worthinvesting in if the NPV is greater than zero. On the other hand, longterm projects with low cost of capital are likely to be ranked highbecause they have bigger NPV compared to short term projects. Thecost of capital used in a project determines the NPV. A change in thecost of capital would thus lead to a change in NPV which in turnwould result to changes in IRR.

Thedecision by TFC to expand to the west is justifiable. Under the NPVrule, a project is worth investing in if the NPV is positive(Groppeli and Nikbakht, 2006). The calculations in TFC case revealedthat the expected NPV would be greater than $ 23, 000,000 meaningthat the project is worthwhile. On the other hand, the IRR rule holdsthat the if the appropriate rate of discount in a given project is X,a project should be accepted if the IRR is greater than X andrejected if the IRR is less than X (Groppeli and Nikbakht, 2006). InTFC’s case, the IRR is greater than the appropriate rate ofdiscount which is 10.92%. It thus means that the project isworthwhile.

References

Groppelli,A., &amp Nikbakht, E. (2006). Finance.Hauppauge, N.Y.: Barron`s.

Related Posts

© All Right Reserved