Net Present Value method Essay

1. Net Present entertain method is one of the methods used in capital budgeting. The NPV is based on the discontinued cash flow. A company that has a proposal for a new project or an investment uses the NPV method to settle down if they should accept it or move on with a varied investment. This method provides valu fitting information to the focusing about the cash outflows related to the investment and cash inflows from the investment with the consideration of the condemnation value of money. The time value of money has been considered in this method because the money invested today will have a different value in the future.The cost capital is the minimum rate ofreturn that the proposed investment needs to guide in order to be accepted. When computing the Net Present Value the future cash outflows and inflows argon discounted at present value at the rate of the cost of capital. If the required rate of return is let down than the cost of capital, then the company should reject the project and should not engage with it any further. On the opposite hand, if the required rate of return is even or higher, then the investment will be able to bring the profit that will provide founds to pay liabilities to companys creditor and shareholders.2. Under Internal regularize of Return the investment is evaluated based on the expected rate of return. The IRR for a cash flow is an beguile rate that results in a NPV equal to zero. In this method the cost of capital is used and alike known as hurdle rate. Hurdle rate is the minimum rate that the investment needs to egest in order to be accepted by the management. After computing the IRR, the decision making personate compares the IRR results to the cost of capital rate. If the IRR is equal or higher that hurdle rate, the investment can be accepted, if turn away project should be rejected.