INTERNATIONAL FINANCE ASSIGNMENT

International Finance assignment

International Finance assignment

Question 1

Investment Decision

As per the calculations, we can easily say that the opportunity under consideration is feasible for Thunderbolt plc.. We have analyzed the given cash flows of this project using techniques such as Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PBP). The reason for analyzing this project by multiple techniques is to increase the reliability and authenticity of our forecast. From the excel sheet, we can easily see that Net Present Value of Project is greater than 1. We accept the project because positive NPVs will lead to gains in the short and long-run.

Comment on Evaluation Methods

The Net Present Value (NPV) is the first Discounted Cash Flow (DCF) technique covered here. It relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment.

Remember that opportunity cost is the calculation of what is sacrificed or foregone as a result of a particular decision. It is also referred to as the 'real' cost of taking some action.

We can look at the concept of present value as being the cash equivalent now of a sum receivable at a later date. So how does the opportunity cost affect revenues that we can expect to receive later? Well, imagine what a business could do now with the cash sums it must wait some time to receive.

In fact, if you receive cash you are quite likely to save it and put it in the bank. So what a business sacrifices by having to wait for the cash inflows is the interest lost on the sum that would have been saved.

Looked at another way, it is likely that the business will have borrowed the capital to invest in the hairdressing saloon. So, what it foregoes by having to wait for the revenues arising from the investment is the interest paid on the borrowed capital.

NPV is a technique where cash inflows expected in future years are discounted back to their present value. This is calculated by using a discount rate equivalent to the interest that would have been received on the sums, had the inflows been saved, or the interest that has to be paid by the firm on funds borrowed.

The NPV approach is not the only method to evaluate an investment? other approaches? such as the payback rule? the Accounting accounting return? the internal rate of return? etc? are also commonly used by firms. The payback rule is widely used by large firms? because of its convenience to calculate. What is the rationale of the payback rule? Generally speaking? it is based on the pay back period of an investment and compares it with the required payback period. The payback period is the length of time an investment takes to recover the initial investment? and the required payback period is usually decided by the firms. If the calculated payback period of an investment is less than the required payback period? then this investment is ...