Understanding Concepts

Understanding the Concepts

Introduction

Small business half success depends on the how well company's management has grip on their business finance concept. The business finance world not only comprises of profit or return but also theories, techniques and concept beyond the limitations. It is essential for either large or small business to gain deep understanding of certain wider concepts; this will assist managers in managing their operation much effectively along with broader decisions throughout the business venture course. This paper will focus on basic concepts of finance that assist in large or small businesses.

Discussion

1. Small Business and Financial Tool

When business considering capital budgeting decision, the first thing which they determine is the profitability of that project. The most usual and common capital budgeting techniques used by business are Net present Value, Internal Rate of Return and Payback Period for project selection.

The most effective and efficient decision is determine through these three method. But in this section the focus would be on two techniques in explaining how of Net Present Value and Payback rule make a good financial decision in small business (Constantinides, Harris, Stulz, 2012).

Concept of Net Present Value

Net present value is the present value of the future cash flows that the project will generate. of NPV of projects in one of the techniques which is most commonly used.This value is calculated by subtracting the initial investment in a project the present value of cash inflows discounted at a rate equal to the cost of capital of the company. If all capital inflows and outflows are measured in terms of cash, this can perform valid comparisons. 

Since being treated with conventional investments, the initial investment is automatically set in terms of current monetary units. Otherwise, the present value of a project is obtained by subtracting the present value of the expenditures of the present value of cash inflows. Hence, in other words, the comparison of future value with the current value investment is determined through NPV. If the NPV value is positive, it demonstrates that project is profitable and attractive in future whereas, negative value of NPV indicates that the project is not wrathful in future and should not consider for investment (Brigham, Ehrhardt, 2012).

There are various bendfits of Net Present Value which can assist small businesses in making good financial decision. These are as followed:

Net Present give much consideration to Time value of money.

While calculating Net Present Value, much consideration is given to before cash flow and after cash flow over the life span.

Projects Risk and Profitability are given much consideration and priority

Net Present Value assists in firm value maximization.

Concept of Payback Period

The number of years the project will take to recover the initial invested amount is determined through Payback Period. The project is attractive if the number of period is less. If an investor is looking for the recover its investment amount immediately or in few years, than this is the best method.

There are various bendfits of Payback Period which can assist small businesses in making good financial ...