Financial Management
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 …
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 …
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. …
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 …
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 …
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 …
Introduction: 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. Bailout cash flows are the estimates of cash flows inflows that shall arise on sale of equipment at the end of the project. The cash inflows …
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 …
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 …
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 …
