I have a ROI group project for my masters class. There's a portion Idon't really know...

I have a ROI group project for my masters class. There's a portion Idon't really know how to approach. This portion would be a:

" Figures of Merit - Report Analysis

This section reviews the Net Present Value, Benefit Cost Ratio, and Internal Rate of Return and why these measures support your project."

How would I write this report?

Solutions

Expert Solution

You need to give a brief introduction of Capital Budgeting and different way of evaluating the same.

Capital Budgeting decision is a long term decision and irreversible decision. It involves investment of capital hence its returns should be measured to justify the investment. The golden rule is higher the return on investment is it good .

Now the question how to measure the ROI of Capital investment. Below are the ways of measuring it

Net present value : Net present value is a method of measuring return on investment where the Annual cash inflows are discounted to its present value based on the cost of capital . The reason why cash inflows are discounted is it is receivable for future period and hence should be measured in present value. The cost of investment is then deducted from the present value of cash inflows. If the present value is positive it means NPV is positive and thereby investment can be made since returns are higher than cost of capital. If the present value is negative it means NPV is negative and there by investment should be avoided
Benefit Cost Ratio : Benefit Cost Ratio is modified version of Net present value where it is measured in terms of ratio . The ratio is calculated dividing Present value of cash inflows by Cash outflows. If the ratio is 1 , it means the returns from project are positive and investment can be made. If the ratio is less than 1 , it means the returns are negative from the project
Internal Rate of Return : Internal Rate of Return is also a modified version of Net present value. it calculates the rate at which present value of cash inflows is equal to present value of cash outflows. If the rate is higher than cost of capital the project is accepted and if rate is lower than cost of capital project is rejected

Given below table to summarize all 3 measures

ekkarill92 answered 1 year ago

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