14 March 2023

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WACC (Weighted Average Cost of Capital)

Introduction - WACC Weighted Average Cost of Capital (WACC) is a crucial tool that helps businesses determine this cost by taking into account the cost of each type of financing and the proportion of each that makes up the company's overall capital structure. By calculating the WACC, businesses can make informed decisions about their investments and evaluate the profitability of their projects. In this article, we will delve deeper into the concept of WACC, explore how it is calculated, and examine its significance in the world of business and finance. Inequality of investor rate of return and company cost of capital Both investor required...

23 January 2023

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Cross Exchange Rate – Simple Understanding

Posted by Ali Murtaza

in All Articles, Financial Management

Cross Exchange Rate Cross Exchange Rate is an exchange rate between two foreign currencies which is computed with the reference of third currency normally in terms of US $. The base currency US$ always has value of 1$. If for example, we know the exchange rate between Rupees (Rs.) and Pound Sterling (£) and exchange rate of Pound Sterling (£) and US ($), but we do not know the exchange rate between Rupees (Rs.) and US ($), we can calculate this by using cross rate calculations. Example: Using Direct Quote The spot rate of Rupees (Rs.) to and Pound Sterling (£) is Rs.284.76 = 1...

15 January 2021

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Foreign Exchange Rates

Posted by Ali Murtaza

in All Articles, Financial Management

Foreign Exchange Rate Foreign exchange rate is the price at which currency of one country is exchanged with currency of another currency. There are two methods of presenting currencies; Direct Quote Indirect Quote 1) Direct Quote Direct quote is the number of units required for domestic currency to be exchanged with foreign currency. In the direct quote domestic currency is written first. For example, Pakistan rupees with US dollar can be expressed in direct quote as Rs.160 for US $ 1. This is written as Rs.160 / $1. 2) Indirect Quote Indirect quote is the number of units required for foreign currency to be exchange with local currency.In...

15 January 2021

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Modified Internal Rate of Return (MIRR)

Posted by Ali Murtaza

in All Articles, Financial Management

How MIRR is different from IRR Modified internal rate of return is a calculation of the return from a project, with an assumption that cash flows earned from a project shall be reinvested to earn a return equal to the company’s cost of capital (Ke) and not IRR. Therefore, in the example of the project with an NPV of Rs.500,000 at a cost of capital (Ke) of 10%, MIRR would be calculated with the assumption that project cash flows are reinvested at a return of 10% per year (which is company cost of capital ke) and not at 15% which is...

15 January 2021

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Internal Rate of Return (IRR)

Posted by Ali Murtaza

in All Articles, Financial Management

Internal Rate of Return (IRR) The internal rate of return (IRR) is another method investment appraisal other than Net Present Value (NPV). It is the discount rate which makes Net Present Value Zero. The companies have their own target of rate of return on particular projects. If internal rate of return (IRR) is higher or equal to the project rate of return ascertained by the company then project is feasible and should be accepted. If internal rate of return (IRR)is lower than the project rate of return ascertained by the company then the project needs to be rejected. How to calculate Internal rate...

15 January 2021

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Time value of money

Posted by Ali Murtaza

in All Articles, Financial Management

Introduction Time value of money is the basic concept of finance which says that value of money as of today is more than value of money in the future period. To calculate time value of money we have two methods; Compounding Discounting Time value of money - Compounding Compounding is the estimate of future cash flows that shall arise when any sum of amount is invested at a given interest rate for a given time period. An amount that is invested today is multiplied by compound factor to arrive at future cash flows at specific interest rate. Where: i = interest rate n = number of years Example 1: A company wants...

15 January 2021

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Bailout Payback Period

Posted by Ali Murtaza

in All Articles, Financial Management

Introduction: [vc_empty_space height="10px"] The bailout payback period considers the time period within which cumulative cash flows are generated by the project after adding cashflows generation from the sale of equipment. [vc_empty_space height="10px"] Bailout cash flows are the estimates of cash flows inflows that shall arise on sale of equipment at the end of the project. [vc_empty_space height="10px"] The cash inflows from the sale of equipment reduces / falls every year. Hence, the disposal amount received in year 4 for example shall be lower than amount received in year 3. [vc_empty_space height="20px"] School Supplies Decision Rule: [vc_empty_space height="10px"] A maximum payback period of the project is determined by the company. [vc_empty_space height="10px"] If expected...

15 January 2021

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Accounting Rate Of Return (ARR)

Posted by Ali Murtaza

in All Articles, Financial Management

Accounting Rate of Return (ARR) Accounting rate of return (ARR) is the return on investment based on specific project. It is calculated by dividing accounting profit after depreciation but before interest and tax (PBIT) with average capital invested. Formula of ARR Average Capital Employed Average capital employed is calculated by taking average of cost of asset and residual value of asset and then working capital is added. Formula of Average Capital Employed Example: A company is considering a project which requires investment on the machinery amounted to Rs.150,000. The machinery life is four years having scrap value of Rs.30,000. Additional capital requirement for the project is Rs.20,000. The...

14 January 2021

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Payback Period

Posted by Ali Murtaza

in All Articles, Financial Management

Introduction: The Payback Period defines the length of time before which the amount invested in the project shall be recovered / received. It is measured in period / time. It is based on cash flows and not on profit. Decision Rule: If expected payback period from the project is within the period determined by the company, the project is accepted and vice versa. For more than one projects, the quickest payback period achieving project is selected. [mkd_blockquote text="Time value of money is ignored in payback period and total return on the investment is also not considered." title_tag="h2" width="" border_color=""] Payback Period with even and uneven annual...

27 December 2020

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Discounted Payback Period

Posted by Ali Murtaza

in All Articles, Financial Management

Introduction: The discounted payback period is calculated by the same way as payback period the only difference is that cash flows are converted into present value. It is the period before which the Present Value of cumulative cash flow becomes zero. Example: Discounted Payback period with even annual cash flow (constant cashflow) A company is considering a project with initial investment of Rs.700,000. The constant cash flows to be received from the project is Rs.200,000 for a period of 6 years. Discount Rate is 13%. Answer: The discounted payback period with even annual cash flow shall be calculated as follows: Year Cash Flow (Rs) Discount Factor (13%) PV of...