discussion

What information or concepts that can be given that I may not have considered? Explain why you either agree or disagree with position.

In business, one of the decisions that often must be made is whether an investment will create value and is worth taking on.  There are a few different ways to accomplish this which are the net present value (NPV), the internal rate of return (IRR), and the payback approach.  The net present value is essentially the difference between the investment’s market value and what it cost (Ross, Westerfield, & Jordan, 2017).  The internal rate of return is closely related to the NPV and it is trying to find a single rate of return that characterizes the merits of the investment (Ross et al., 2017).  Last, the payback rule is simply the length of time it takes to make back the investment money (Ross et al., 2017).  The problem with the payback rule is that it does not consider the time value of money and it does not consider risk.  The IRR has issues when it comes to unconventional cash flows or if you are trying to compare two or more investments (Ross et al., 2017).  For a business’s management, it is essential that actual value is estimated so that the decision to invest is made wisely and the NPV is considered an adequate tool to do just that (Militaru, 2016). 

I agree that the net present value seems to be a better choice in which to calculate whether an investment is worth taking on for a company.  For the payback rule, the only thing it calculates is how long it will take you to make your initial investment back.  It does not estimate future cash flow and it ignores time value.  It also biases us towards shorter-term investments because it ignores the cash flow beyond the cutoff (Ross et al., 2017).  The internal rate of return has problems when the cash flow is not conventional or when you are trying to compare more than one investment (Ross et al., 2017).  It also is not an exact calculation but a trial and error (Assist Knowledge Development, 2018).  The net present value estimates the future cash flow that is expected from an investment and does so taking into account the discounted cash flow.  It is considered to be the only one that is not flawed in some way making it the preferred approach (Ross et al., 2017).