Accounting
What are some differences between IRR and PI?
Internal Rate of Return (IRR)
IRR is the method by means of which returns on investment are calculated. IRR reflects the value of money over a period of time. In short it explains returns on investments in terms of interest rates. It tells how much rise in interest rate is needed to completely remove any expectation of good returns on investment. When IRR is really high, it means your investment involves little risk. A low risk investment is always desired and you might feel like undertaking a project based on high IRR. However IRR is not always accurate and may give highly unrealistic picture. Since IRR doesn't really talk about actual returns, it is considered safer to opt for a project that gives realistic IRR instead of one that shows unbelievably high IRR. When there is no initial cash outflow, the IRR produced may actually be in thousands, showing that the project or action is completely safe and absolutely risk-free. For this reason, it is important to have some initial cash outflow involved in order to keep IRR realistic.
Profitability Index (PI)
The profitability...
accounting income and cash flow? Which do we need to use when making decisions by using NPV? Explain in short. Accounting income takes in consideration total profits; which is usually some form of total revenues minus total expenses. Cash flow is a totally different concept because it doesn't necessarily account for total income, rather it just accounts for cash out flows and in flows. For example, it may not account
Managerial Acctg The weighted average cost of capital is as follows: In a net present value analysis, the cost of capital is often used as the discount rate. A net present value analysis seeks to reflect the value today of cash flows in the future. In order to do that, the future cash flows must be discounted back to present day dollars. There are a number of different ways to obtain the
Corporate Budget The correct net cash flow for the second year is $455,000 The impact of depreciation -- in all years -- is that it lowers the taxes payable. Depreciation is a non-cash expense, and therefore it lowers the taxable income of the organization. When the taxable income is lowered, the overall taxes are also lower. The depreciation does not count in the net cash flow, and therefore the net cash flow
28% This gives project B. An IRR of -0.028% Part C Using the above assessments each may indicate which investment may be preferred. Using the payback period project a has a payback period of 4 years, whereas project B. has a payback period of 3 years 8 months. If the fastest payback period is preferred than project B. will be chosen. The NPV which discounts the net revenues into a net present value shows
Ratio Analysis a) The price-earnings ratio reflects two things -- the company's earnings and the market price. By no means is there a law that says one firm's P/E ratio should be in line with either the market or the competitors. First, an explanation of the earnings. The earnings component of the P/E is past-looking. The profit margin for HRG is fairly low -- 1.7% - reflecting that its earnings are
Background My company is considering a certain project undertaking. Our CFO is uncertain on whether or not to embrace the project. Having estimated the cash flows and NPV for the project, and having an estimated NPV as +$10, I am tasked with the role of analyzing the feasibility of the said project on the basis of the cash flows and NPV estimates. In so doing, I will address the kind of
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