How can we estimate that firm is going to benefit, Financial Management

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Ho can we estimate that firm is going to benefit from projec

To calculate how firm is going to benefit from project we need to calculate whether firm is earning the required rate of return or not. Though the problem is that projects would have different time frames of giving returns. One project can be giving returns in just two months, another can take two years to start yielding returns. If both projects are offering the same %age of returns when they start giving returns, one which gives earnings earlier is preferred.

This is a simple case and is easy to solve where both projects require same capital investment, however what if the projects required different investments and would give returns over a different period of time? How do we compare them? Solution is not that simple. What we do in this case is bring down returns of both the projects to present value and then compare. Before we study about present values, we have to first understand future value.

 


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