discussion

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

Companies utilize many financial methods to determine if an investment is sound. Three of the key methods used are payback rule, Net Present Value (NPV) and Internal Rate of Return (IRR). They are all integral and each tell a similar yet different story about the investment.  NPV speaks to the difference between the investments market value and the cost to the company (Ross et al., 2020).  Looking at this value will allow the financial manager the chance to prove that the investment will return a profit larger than the initial cost outlay.  Once calculated the NPV will either be positive or negative. If positive the investment should be considered if negative the investment does not make sense for the organization and should be rejected.

Where NPV looks at the cost difference, IRR looks at the point where the investment will break even (Gallo, 2016). IRR uses the NPV within its computation. When represented as the discount rate, the NPV will result in zero once the computation reaches the required return. In this case, the investment must meet a minimum return threshold before it can be considered viable. If the rate at which the NPV is zero is above the threshold the project would be accepted if it is lower, then it should be rejected. The payback rule loosely looks at the amount of time it would take to recover any initial capital spend (Ross et al., 2020). Of the three methods this is the simplest yet probably the one with the most faults. The payback rule does not account for any discount rate, it ignores cash flows that are outside of its initial parameters and it does not favor long-term projects (Ross et al., 2020).

Although all of these options are typically used in capital budgeting, of the mentioned methods, the NPV method is the more favored method by financial professionals. This method allows them to evaluate in terms of actual numbers. By its nature, NPV is preferred because it allows companies to work in terms of long-term results (Militaru, 2016). IRR is more conceptual and provides only an estimate of the rate and like the payback method does not accurately account for the time value of money (Gallo, 2016).  The most relevant decisions are made when multiple methods are used together to evaluate the investment.