Grand Canyon University Net Present Value Method Discussion

Description

Explain how a net present value (NPV) profile is used to compare capital projects. How does this profile compare to that of internal rate of return (IRR)? How does reinvestment affect both NPV and IRR? Support your rationale with at least one citation from the literature.

Net Present Value (NPV) profiles are used to compare the value of two or more capital projects. The NPV profile shows the sum of all cash flows expected from a project, both inflows and outflows, and is adjusted for the time value of money using a discount rate. A positive NPV indicates that a project is profitable, whereas a negative NPV indicates that a project is unprofitable. The NPV profile is typically compared to the Internal Rate of Return (IRR) profile to determine which project provides the most value. The IRR profile shows the discount rate at which the NPV of a project is equal to zero. A higher IRR implies a higher rate of return and, therefore, a more profitable project. However, the NPV profile is more accurate in a comparison of projects because it takes into account the time value of money and the risk associated with a project. Reinvestment affects both NPV and IRR because the cash flows associated with a project can be reinvested at different rates. Reinvesting cash flows at a higher rate will increase the NPV of a project because the present value of future cash flows is higher. This will also increase the IRR of a project because the discount rate at which the NPV is equal to zero is higher. On the other hand, reinvesting cash flows at a lower rate will decrease the NPV and IRR of a project. In conclusion, NPV profiles are used to compare the value of two or more capital projects. The NPV profile is more accurate than the IRR profile in a comparison of projects because it takes into account the time value of money and the risk associated with a project. Reinvestment affects both NPV and IRR because the cash flows associated with a project can be reinvested at different rates.

References:

McLaney, E. J. (2017). Business finance: Theory and practice (14th ed.). Harlow, England: Pearson.

Explanation & Answer:

250 words

User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.



^{Have a similar assignment? "Place an order for your assignment and have exceptional work written by our team of experts, guaranteeing you A results."}

Our Service Charter

1. Professional & Expert Writers: Eminence Papers only hires the best. Our writers are specially selected and recruited, after which they undergo further training to perfect their skills for specialization purposes. Moreover, our writers are holders of masters and Ph.D. degrees. They have impressive academic records, besides being native English speakers.

2. Top Quality Papers: Our customers are always guaranteed of papers that exceed their expectations. All our writers have +5 years of experience. This implies that all papers are written by individuals who are experts in their fields. In addition, the quality team reviews all the papers before sending them to the customers.

3. Plagiarism-Free Papers: All papers provided by Eminence Papers are written from scratch. Appropriate referencing and citation of key information are followed. Plagiarism checkers are used by the Quality assurance team and our editors just to double-check that there are no instances of plagiarism.

4. Timely Delivery: Time wasted is equivalent to a failed dedication and commitment. Eminence Papers are known for the timely delivery of any pending customer orders. Customers are well informed of the progress of their papers to ensure they keep track of what the writer is providing before the final draft is sent for grading.

5. Affordable Prices: Our prices are fairly structured to fit in all groups. Any customer willing to place their assignments with us can do so at very affordable prices. In addition, our customers enjoy regular discounts and bonuses.

6. 24/7 Customer Support: At Eminence Papers, we have put in place a team of experts who answer all customer inquiries promptly. The best part is the ever-availability of the team. Customers can make inquiries anytime.