Net Present Value, Projected Income Statement, and Income Statement
In Chapters 8 and 9, we cover the procedures to evaluate a potential investment opportunity, and how to estimate the NPV of an investment opportunity based on projected cash flows.
Your task this week is to understand the class material comprehensively and answer the following questions:
If the NPV method is conceptually the best tool for capital budgeting, why do you think multiple measures are used in practice? (30%)
What is the difference between the projected income statement in Chapter 9 and the Income statement we covered in Chapter 2? Why is there a difference? (30%)
Visit Wall Street Journal (https://www(dot)wsj(dot)com (Links to an external site.)) and find an article that you think is interesting. (40%)
Post the link and share your thoughts with your classmates.
*You have free access to WSJ as FIU students. Please visit FIU library (https://library(dot)fiu(dot)edu/c.php?g=917336&p=8147809 (Links to an external site.)) for details.
Investment Decisions
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Why are Multiple Measures of Capital Budgeting Used in Practice?
As much as the Net Present Value (NPV) is conceptually considered the best capital budgeting tool, other measures are still used in practice because the goals and objectives of a business vary. Some investment investors may require a shorter time to break even despite having a positive NPV. NPV as a capital budgeting tool may be disregarded. Similarly, the cost of capital can be a deal-breaker; as a result, investors may opt for investments whose internal rate of return (IRR) exceeds the cost of capital. Therefore, investments have a lot of facets that need to be considered justifying why multiple measures apart from NPV are used in capital budgeting.
Difference between Projected Income Statement and Income Statement
The projected income statement is prepared based on future estimates, and historical data is used to make future projections of earni...
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