Task # 2. Select the best way of investing 120 thousand US $ on deposit for one year. The choices are:
a) the bank pays 23% of income on a quarterly basis ;
b) the bank pays an income of 30% every four months ;
c) the bank pays 45% income twice a year ;
g ) the bank pays 120% of annual income .
In world practice designed several methods of the evaluation of investment projects, All methods can be divided into two groups: - Methods of assessing the effectiveness of investments based on discounted cash flows
- Simple (traditional) methods of evaluation of investment projects
Methods of assessing the effectiveness of investments based on discounted cash flows are: - Net present value (NPV);
- Profitability index (PI);
- Internal rate of return (IRR);
- Discount payback period (DPP);
Simple (traditional) methods of evaluation of efficiency of the investment projects are: - Payback period (PP);
- Accounting rate of return (ARR)
Evaluation of efficiency of the investment projects
Financial
Economic
Balans- Sheet (form№1)
Financial coefficients
Payback period
Report about profit and loss (form№2)
Cash Flow (form№4)
Simple (Statistic) methods
Methods based on discounted cash flows
Accounting rate of return
Net present value
Profitability index
Internal rate of return
Discount payback period
Net present value (NPV) - Net present value (NPV) - is the difference between the amount of cash flow generated by the investment project, discounted to their present value and the discounted sum of all investment costs required to implement this project. The method is based on two points: any company seeks to maximize its value and different time period costs are unequal in value.
- The Formula is as follows:
- If NPV> 0, the project is acceptable, the value of the company is increased by this amount.
- NPV = 0, the project is neither profitable nor unprofitable.
- NPV <0, the project is not accepted, unprofitable.
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