ACCOUTING AND FINANCE

Accounting and Finance

Accounting and Finance

Introduction

Value Investing is simply to invest in assets whose intrinsic value is well below its market price. Therefore, the only thing that should be taken into account when investing is the current price and intrinsic value of the assets.

Discussion

There are several methods to calculate the present value of an asset, one of the most used the discounted cash flows (discounted cash flow).

Discounted Cash Flows

For the purpose of discounted cash flow we have chosen NPV (Net Present Value) and IRR. The reason for these methods is to make the decision regarding the acceptance of the project.

NPV= Initial investment - CF/(1/r)^1 +- CF/(1/r)^2 +- CF/(1/r)^3 +- CF/(1/r)^n

IRR= [Factor of internal rate of return = Investment required / Net annual cash inflow] (1)

Non- Discount Cash Flow

For Non- Discount Cash Flow we will calculate Payback period and Accounting rate of return (ARR).

PP= (Cost of Project/Annual Cash Inflows)

ARR= Average profit/Average investment

After the calculation by the above Non- Discount Cash Flow and Discount Cash Flow it is recommendable that the company should purchase machine C. The reason for this is that machine C is showing higher value in terms of Net present value which is 20.7139 whereas others are showing lower value than this. Moreover, the Payback Period and IRR of the machine are lower than other machines. As we know that the NPV (Net Present Value) is very important for the valuation of investments in fixed assets, despite its limitations in unforeseen or exceptional circumstances consider market (Jackson S., Sawyers R., Jenkins G., 2009, pp. 286). 

If its value is greater than zero, the project is profitable, considering the minimum value for investment performance. Company usually compares different alternatives to see if a project is better or worse. Usually the alternative with the highest NPV is usually the best for the institution, but need not always be so. There are times when a company chooses a project with a lower NPV due to various reasons such as might be the image that you bring to the company, whether for strategic or other reasons at the time of interest to this entity. You can also consider the interpretation of NPV, depending on value creation for the company:

If the NPV of a project is positive, the project creates value.

If the NPV of a project is negative, the project destroys value.

If the NPV of a project is zero, the project does not create or destroy value.

Moreover, the cash flow to equity is calculated as: Net Income for the period n + Depreciation (amortization period n) - Investments for the period n + (-) change in long-term debt for the period n (increase or decrease) - an increase of working capital debt-free cash flow estimated by a similar formula, but it will not increase and decrease in long-term debt, and, the value of debt-free cash flow increases by the amount of interest payments, adjusted for tax rate (Heisinger K., 2010, pp.374).

The key to the formula and its interpretation is in ...