Which tools you would use to decide whether a project is worthy of financing? Also, specifically...

Which tools you would use to decide whether a project is worthy of financing? Also, specifically when do you think the Payback method is most often used?

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Expert Solution

NPV- Net present value is the difference between the "Present value of cash inflows and present value of cash outflows" for a specific period. This method is one of the best methods of evaluating a project by analyzing its profitability and feasibility.

Formula:

NPV = Present value of cash Inflows- Present value of cash outflows.

Present value = Cash flows / (1+r)ⁿ

Where r is discounted rate and n is number of periods.

A positive NPV shows the acceptance of a project. It states that earnings from the project will be more than cost of the project so the project/investment is profitable and should be approved and accepted.

This concept is mostly used because it takes the "Time value of money" into consideration.

Payback period method- This method calculates the length of time, required to cover the project's cost. This method ignores the time value of money concept. This method tells, within how much time, a project will start getting profitability after covering its cost. A longer payback period is not acceptable in project point of view.

Formula for even cash flows = Initial investment / Cash inflow per period

jeff jeffy answered 1 year ago

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