Finance : Project Evaluation and Leverage
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Part A: Describe the following project evaluation processes: NPV, Payback, AAR, IRR. Is any one evaluation process better the others? Why?
Part B: What is the difference between Operating Leverage and Financial Leverage? Also, describe the concepts of DOL, DFL and DCL
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Project Evaluation and Leverage are investigated.
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Investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Return on Assets (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the greatest investment to the worst.
First, the most important concept of evaluating these investments is the NPV. NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. The projects can be ranked from the most positive NPV to the lowest to determine profitability. This quantitative ranking method is ...
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