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Querist : Anonymous

Querist : Anonymous (Querist)

05 September 2010 kindly comment on the following:
1.pay back period
2.average rate of return
3.net present value
4. profitability index
5.internal rate of return

CA SMR

CA SMR (Expert)

06 September 2010 1.Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. For example, a Rs1000 investment which returned Rs500 per year would have a two year payback period
2.The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment and dividing it by the number of years in the life of the investment. The average rate of return does not guarantee that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average rate of return.
3.The net present value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.
4.Profitability index (PI), is the ratio of investment to payoff of a proposed project.
The ratio is calculated as follows:

PI= PV of future cash flow/Initial Investment
5.The internal rate of return on an investment or project is the annualized effective compounded return rate or discount rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero.

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