Accumulated Value, Present Value, and Internal Rate of Return

Summary and Review for the Business
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Summary and Review for the Business
Making decisions on whether to invest in a business that pays out in a short time or one that pays in a long time is difficult (Hammand, 2000). Some payout in a short period but with greater magnitude and, in some cases, minor importance. Those that payout after a long time is similar to this. They can payout in both tremendous and minor magnitudes. This decision making and planning is hard to make since no one knows what the future holds; hence it is worthwhile to take risks in business.
According to Hammand (2000), decision-making and planning where to invest your money will depend on when one is ready to wait. Hammand also believes that an investment that requires an initial outlay of $60,000 has returns lasting just three years into the future, and these returns are sure to occur. However, one returns $20,000 per year at the end of the next three years, whereas the second pays $40,000 a year from now and $9,000 per year at the end of the second and third years. First, you probably notice that Investment 1 pays back $60,000, whereas Investment 2 pays back only $58,000. Based on this, you may find yourself leaning toward Investment 1, that is until you notice that Investment 2 pays $20,000 more in the first year. You say to yourself, "I could do something with that extra $20,000. At the very least, I could get—say—5% from an insured savings account. If I am clever, I can do even better." This clearly shows that the urgency of the money will dictate which investment plan one will go with. Though total profits are more advantageous, the time taken to reach them should be considered. The time taken to produce entire profits might be enough to create other profits that will expand the business and become prosperous. This money may also be invested in different places and generate more profits than the intended one.
Secondly, Hammand (2000) maintains that the attractiveness of a given pattern of future cash flows depends partly on what use you can make of the receipts. He suggests that the higher the number of receipts, the higher the profits gained. On the contrary, I believe that the timing of receipt of cash flows is essential—the earlier, the better. This is the "earlier-the-better" rule. This is where invested money is given out earlier. However, it is more robust when one can earn on the receipts that it accumulates over time. The fewer the receipts, the weaker the rule. There, we look at the factor that money has time value, where we will consider the investment plan that pays after a relatively long time. Both of these two facts play a heavy role in decision-making and planning. They need to be considered to achieve perfect results.
The outlay dictates whether the investment was worth it or not. This can be done by bringing accumulative value into the picture and finding whether the profits earned were sufficient to satisfy the wait. A high outlay that gives out a low profit is negative in business, whereas a low outlay with high yields is an investment to venture into. Hammand (2000) posits that the accumulative value is another critical factor that keenness shou...