NPV, IRR, PPAYBACK, ROCE

NPV, IRR, Payback, ROCE



NPV, IRR, Payback, ROCE

NPV

Net Present Value, otherwise known as NPV, is an accounting term used in capital budgeting where the present value of net cash inflow is subtracted from the present value of cash outflows. Then this value is compared with projected profit ratios for the project in the future.NPV is useful, particularly to investors, because it compares the value of money today versus the value of that same money in the future, after taking inflation and return into account.

The project is rejected if the calculated NPV is less than zero that is negative, because cash flows are negative. According to the commensurate principle that the future value of money, unless it is accruing interest, is usually less than the held value at present. Thus, the NPV is calculated as the present value of the project's cash inflows minus the present value of the project's cash outflows.

IRR

Internal rate of return (or IRR) is usually one of the most popular of the return rates used by real estate investors in an attempt to measure the performance and financial rental property because it calculates the time value of money. Therefore, it provides a link between the current value and future value of income; it allows the investor to take into account both the timing and magnitude of cash flows arising from investing in income-producing property.

Payback Period

The period when the initial investment is returned back. Projects that have negative net present value would have no recovery time, because the initial cost will not be refunded in full. This is in contrast to the recovery period where the gross inflow of cash flows may be greater than the initial start, but when the influx of discount, the NPV is negative. Payback ignores the benefits that occur after the recovery period and, consequently, does not measure profitability. It also ignores the time value of money. For these reasons, other methods of capital budgeting, such as net present value, internal rate of return or discounted cash flows is generally preferred.

ROCE

Return on capital employed (ROCE) is the profitability of business placed on total capital employed in the business. Capital includes all sources of financing (debt + shareholders). To accomplish these statements must be to interest (to return to creditors), and taxes. Return on capital employed is an important indicator of profitability. Many analysts believe that investments in debt ...