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Article 1:
Introduction:
This paper aims to assess the different methods related to capital investment decision-making evaluating the most used and advantageous in this case net present value against other systems when considering all the aspects for the non-financial and financial implications thinking in long or in short-term contexts. The major objective is to evaluate the risks involved for those decisions using for instance accounting rate or return (AAR), payback period (PP), NPV (net present value) or internal rate of return (IRR). Some companies combine some of them (Atrill and McLaney 2012) or some of them use their previous experiences if the company is a small one. If bad decisions are made, they can bring calamitous consequences for them. For profitable organizations capital investment decision-making are always made bearing in mind the profits or revenues will be maximized for the shareholders particularly for MNEs that acts globally.
Main methods for assessment of capital investment
NPV definition by Woods, J, & Randall, M (1989) - " As the present value of all cash flows (assuming equity financing) discounted at the firm's weighted cost of capital is used".
When using PP the major focus is liquidity how fast the project could financially compensate their expenditures when comparing with extended PP lapses.
AAR evaluates the possible achievements of a particular business before it has been implemented, not considering timing at all.
IRR is driven from NPV of a determined business considering timing in combination with some residual of PP (Bosch, Montllor-Serrats and Tarrazon 2007). From the four above-mentioned methods of capital investment assessments; IRR is the closest to the NPV (Atrill and McLaney 2012).
An example that could be given is the use of NPV for GM in Brazil when deciding to manufacture a smaller car since it will be feasible to weigh the results if the NPV is positive then the new project will generate the added value of the investment for the shareholders.
Conclusion:
NPV is broadly usable since it considers the most important components of the cash flows namely, the timing of the project and the relevant entire whole cash flows that it might incur within the project for decision-making, keeping in mind the targeted outcomes of the organization meaning a positive NPV will increase wealth on the contrary a negative one will decrease it (Atrill and McLaney, 2012). On the other hand, organisations are seeking always for new tools to be used to evaluate capital investment tools to reduce losses and risks and some small companies might use other (primitive) methods, as well.
Article 2:
Introduction
In order for most businesses to be profitable, they regularly make investment decisions. The outcome of these actions can greatly impact the financial success of the organization at a specific point in time. There are four common methods used for businesses to evaluate these opportunities "accounting rate of return, payback period, net present value, and internal rate of return" (Atrill & McLaney, 2012, p. 276). Net present value is seen as one of the most advantageous methods for evaluating investment decisions due to its considerations and processes.
Net Present Value
The net present value considers the purchase cost of an investment alongside the operating profit that the investment will provide to the business throughout each of its years of operation (Atrill & McLaney, 2012). However, as to fully evaluate the investment against the costs of risk, interest loss, as well as inflation, the net present value equation also takes into consideration the interest rate of a different investment that the organization could make, in order to determine which investment would be the most profitable (Atrill & McLaney, 2012). In order to make this process significantly easier for management accountants and business decision makers, a chart was developed listing the rate of which an investment is discounted for each investment duration and competing interest rate (Atrill & McLaney, 2012, p. 293). If the result of this equation is positive, it means the investment has a higher rate of return than the competing investment and should be accepted, however if the result is negative, the organization should explore the alternative investment (Gallo, 2014).
Most managers choose to use net present value for two reasons; the first is that it "considers the time value of money, translating future cash flows into today's dollars", second it provides a finite number in which "managers can use to easily compare an initial outlay of cash against the present value of return" (Gallo, 2014, p. 4). In fact, net present value is so easy to calculate there is a function in Microsoft Excel that will complete the task for you, making the process readily available to nearly all business managers (Gallo, 2014). While the net present value method does have its downfalls, such as the potential uncertainty of the future and non-concrete value estimates, due to the simplicity of its formula a number of 'add on's' have been developed in order to customize it to each organization's needs (Chen, 2012).
Conclusion
The net present value method has multiple benefits for organizations, it is not only extremely easy to use and implement, but due to its inclusion of both the time value for money as well as the accounting for all costs and benefits (Atrill & McLaney, 2012). It is understandable that of the 392 American firms surveyed in 2001, 74.93% of organizations were utilizing the net present value method.