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

[vuassignments]

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


Definition of 'Net Present Value - NPV'

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

The following is the formula for calculating NPV:



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Net Present Value (NPV)

where:


Ct = net cash inflow during the period

Co= initial investment

r = discount rate, and

t = number of time periods

In addition to the formula, net present value can often be calculated using tables, as well as spreadsheets such as Microsoft Excel.

explains 'Net Present Value - NPV'

Determining the value of a project is challenging because there are different ways to measure the value of future cash flows. Because of the time value of money, a dollar earned in the future won’t be worth as much as one earned today. The discount rate in the NPV formula is a way to account for this. Companies have different ways of identifying the discount rate, although a common method is using the expected return of other investment choices with a similar level of risk.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount of, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.

[Vuhelper]

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.

[Xpert]

That's the idea solution i guess. Students should consult and participate in this forum to get helped.
regards

[Vuhelper]

Definition of 'Internal Rate Of Return - IRR'
The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project.
As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
IRR is sometimes referred to as "economic rate of return (ERR)."
explains 'Internal Rate Of Return - IRR'
You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth.
IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.

[ayesha-post]

Q.2: Suppose computer A is connected to another computer B by a passive hub at home. You are required to mention the type (LAN, MAN or WAN) of this computer network? Support your answer with reason?

1) Geographical area:
As we knew that, A and B computer connected with each other at home, it's one good reason to understand that, our network is Local area network LAN. Because local area network always restricted to limited geographical area like home, work station, building etc.
2) Passive Hub:
if we talk about passive hub, it is central connecting device in network that act as a point contact for wires from numerous stations. But it doesn't coordinate as a signal regeneration or processing of signals. So it's second good reason to understand that, we are under local area network LAN. Suppose that, we are in WAN or MAN network, definitely we need to regenerate signal to maintain network effectiveness . But here we are using passive hub, so we are in Local area network.