Question

explain the following terms based on your own examples

(a) Interest rate of return

(b) Cost benefit analysis

(c) the break even point

(d) Net present value

(e) Sensitivity analysis

Answer 1

Ans : A) Interest Rate Of Return : In IRR it considers what discount rate will be needed to produce an NPV that is net present value of 0 for the product . Every product has some or the other things have a net present value of zero but they have different amount of Interest Rate of Return which could vary for different companies . The internal rate that procduces the net present value as zero it is then termed as internal rate of return . For ex : If i am investing $1000 and i am getting a 10% interest on that , So that $1,000 amount now earns $1,000 x 10% = $100 in a year. Now that $1000 becomes $1100 in one year`s time . Which means that $1,100 in the next year would only worth for $1,000 now.

B) Cost Benefit Analysis : In this analysis we take up or start up any project or business , for that we have to invest certain amount of money in that which is termed as cost and the return that you are getting from that project or busines is termed as benefits . Therefore benefits needs to be maximized as compared to the cost . For ex : A company started a project , namely X project . In which X project Total cost = $5000 and the Total Benefits Earned = $10,000 , therefore the Cost Benefit Ratio = 2 which states that the project is very much capable of earning double the cost invested .

C) The Break Even Point : It is point where there is no loss and no profit at that point . In terms of a company a point where company`s revenue is equal to its cost . For ex : If a company is investing $5000 as an initial investment or as a cost and the benefit is also $5000 then the cost = benefit , which means that , its a point where there is no loss and no gain .

D) Net Present Value : NPV is an important evaluation technique which is used  to evaluate a project, business or an investment . It is used along with IRR (Internal Rate of Return) to evaluate an investment made at that time . NPR is based on the concept of Time Value of Money where we calculate the present value of future cash flows (future value). For ex : if i am investing $1000 and i am getting a 10% interest on that , So that $1,000 amount now earns $1,000 x 10% = $100 in a year. Now that $1000 becomes $1100 in one year`s time . Which means that $1,100 in the next year would only worth for $1,000 now.

E) Senstivity Analysis : It is used to determine how the independent variables value will impact a dependent variable under certain assumptions . It works under the principle of change the model and observe the behaviour . It is also known as What If Analysis . For Ex : If Company X is investing a $6000 in a start up , which means the cost is $6000 now sensitivity analysis would analyise the project depending on the market demand and supply nd tells us what would be the varibles that would affect the investment and also the cash flows . If that company takes up insurance of about $500 then that would affect the company benefit ratio because it is an investment made by them which would increase the cost and to recover the cost company should get sufficient amount of benefits .

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