To check the feasibility of projects, investors and companies normally use the Net Present Value (NPV) and the Internal Rate of Return (IRR) methods. Each of these two techniques has different assumptions, including the assumption of reinvestment rate.Generally, NPV doesn’t have a reinvestment rate assumption, while IRR does have it. The reinvestment rate assumption, therefore, changes the IRR’s overall outcome.Net Present ValueNPV is tool companies use for capital budgeting decisions. NPV is calculated by determining the expected cash outflows and inflows for a project and discounting them with a discount rate. NPV has more inputs and flexibility in comparison to ... Read More

The Pure Play Technique is a frequently used method of determining the cost of a divisional project. It involves the following major steps −Identifying Comparable FirmsThe first step in the Pure Play Method is to find identical firms with similar features. In the real world, it is impossible to find exactly similar firms, as even the most resembling firms have different features. However, it is not impossible to find two or three firms that have quite similar features, and hence finding two to three firms with similar features (not exactly similar) is sufficient for the process.If no matches are found, ... Read More

Opportunity Cost is a term widely used in Finance and Economics. It is not found in Accounting because it is not an explicit cost paid out of the pocket. Rather, it is an implicit cost which is why Accounting does not include it. Opportunity cost is related to investment decisions. In Finance, it is often used when alternate use of money is required.Alternate Uses of MoneyThe opportunity cost of capital usually represents the alternate uses of money.For example, let's suppose an investor has INR 100, 000 in his hand and he wants to invest the money in the stock market. ... Read More

The terms "conventional projects" and "non-conventional projects" are derived from conventional and non-conventional cash flows. Therefore, it is necessary that we understand the difference between conventional cash flows and non-conventional cash flows.Conventional Cash FlowsConventional cash flow is a series of cash flows that go in one direction over time. If the initial flow is an outflow, then the next flows will be followed by successive periods of cash inflows.This type of inflows can also occur so that if the preliminary transaction is a cash inflow, it will be followed by a series of cash outflows. Accordingly, the mathematical notation would ... Read More

Businesses always need to know how much inventory is left and what is its worth. This is especially applicable to eCommerce firms. It is therefore of prime importance to calculate the inventory with the right inventory tracking method to manage the eCommerce demands and earn profits from them.There are many variables in the calculation of inventory and hence keeping track of it may look gruesome. Fortunately, there are ample inventory tracking solutions to help businesses in continuing their operations. The "weighted average cost" is one of them.What is Weighted Average Cost (WAC)?"Inventory weighted average" or the "weighted average cost" is ... Read More

The payback method is a non-DCF method for investment evaluation. However, it is quite popular among economists and financial managers due to some virtues mentioned below −SimplicityAs the time value of money and discounted cash flow are not considered, payback is a simple standalone tool for the evaluation of investments. Also, payback is quite easy to calculate and understand which is why it can be used by non-financial managers too. Simplicity in calculation and use is probably the most notable virtue for the popularity of the payback method.Cost-effectivenessThe payback method is not only simple but is also quite cost-effective to ... Read More

Both "cash flow" and "profit" are vitally important for businesses and there are distinctions and notable differences between the two. As a business owner, taking cash flow for profit can be a serious mistake. While a company can be highly profitable with a little cash flow, some companies may have high cash flows yet are less profitable.Cash FlowCash flow in brief is the amount of money that comes into, through and out of the businesses over a set period. Credit from suppliers, money owed to debtors, and cash in bank are not included in cash flow. It is completely concerned ... Read More

What is Preferred Stock?Preferred stock is used to fund expansion projects or improvements that firms seek to engage in. Like all other equity capital forms, selling preferred stock helps companies to raise funds.Preferred stock does not dilute the ownership stake of common shareholders, as preferred shares don’t hold the same voting rights that common shares do.What is the cost of preferred stock?The price of the preferred stock is the price the company pays in return for the income it gets from the issuance and sale of shares. It is the money a company pays in a year divided by the ... Read More

Payback is a method related to capital budgeting. The payback period in capital budgeting refers to the time required for the return on an investment (ROI) to "repay" or pay back the total sum of the original investment.Payback is a popular method of evaluation of investment because it is easy to understand and calculate regardless of what it actually means.Despite being a non-DCF evaluation method, payback is used extensively in the evaluation of investments for its simplicity in calculation and application. It is quite useful in comparing the calculation of similar investments.The payback method doesn’t have any specific criteria for ... Read More

Net Present Value or NPV is a true measure of an investment’s profitability and gain. However, like all the other methods, the NPV calculation has its own merits and demerits.Merits of NPV MethodFollowing are the merits of using the NPV Method as an investment evaluation method −NPV deals with the time value of money. According to the time value principle, a rupee today is more in worth than a rupee tomorrow. Including time value helps the principle earn true profits on a future date.NPV is the measure of true profitability as considers all cash flows of the investment. Estimating and ... Read More