Imagine you are a consultant who must recommend whether to purchase a company.
Explain how you would evaluate the expected rate of return from the investment and the method to evaluate the investment decision. Assess the disadvantages and advantages of the investment method and why the method would provide the most accurate measure for the anticipated rate of return requirement. Justify your recommendation.
Respond:
As a consultant, it is important to explain to the client the concept of Interest Rate of Return – IRR and the Net Present Value, which are two methods that help estimate the discount rate (IRR) and the cash flow (NPV), especially when comparing projects or trying to estimate the course of the investment, to start, the client must remember that NPV computes in dollars, different from the IRR which represent a percentage.
In the case of the NPV, the client must understand that this is a primary capital budgeting technique where the cash inflows are discounted to their present value and then compared with the capital outlay required by investment, a good proposal of the company in question is when the NPV is zero or positive, even if it is higher, the investment becomes more attractive (J.J., 1). Advantages of using the NPV method include the consideration of before and after cash flow, the different discount rates used during the project, and how to maximize the returns (Sardana, 2), the disadvantages of this method include the difficulty of using a suitable discount rate and is not an exact science for estimating the time need it to reach a positive NPV (Sardana, 2).