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Net Present Value or NPV is a true measure of an investment’s profitability and gain. However, like all the other methods, the NPV calculation has its own merits and demerits.Merits of NPV MethodFollowing are the merits of using the NPV Method as an investment evaluation method −NPV deals with the time value of money. According to the time value principle, a rupee today is more in worth than a rupee tomorrow. Including time value helps the principle earn true profits on a future date.NPV is the measure of true profitability as considers all cash flows of the investment. Estimating and ... Read More
The Discounted Cash Flow (DCF) method is a widely used technique for valuation in the financial world. The extended procedure of Net Present Value (NPV) is an exclusively used technique in valuing capital investment projects. These projects usually cover the purchase of machinery and equipment as well as the valuation of businesses in cases of mergers and acquisitions (M&A).The DCF method may be quite popular, but it has a major flaw: it does not show any flexibility of cash flows. In the real world, capital investment projects can be changed at any time, and hence, the DCF technique is worthless ... Read More
Capital Budgeting Decisions are critical in nature, and they are complex too. Capital budgeting decisions are not taken frequently and since large funds are involved, the decisions must consider the long-term impact on the profitability and cost structure of the firm.Another important note about capital budgeting decisions is that they are irreversible in nature. Therefore, capital budgeting decisions have to be taken after thorough analysis and research.The significance of capital budgeting decisions can be categorized into the following five subjects −GrowthCapital budgeting decisions are important because they extend the growth of a company. The decisions are taken to make the ... Read More
Usually, the investment decision rules are known as capital budgeting decisions or investment criteria. To determine the financial worth of an investment project, sound capital budgeting rules should be followed.The most important property of a good capital budgeting technique is that it should maximize shareholders’ wealth. However, there are some other rules too that must be followed for making an investment decision. These include the following −An investment decision should address all cash flows to determine the correct profitability of a project. This should include all cash inflows and cash outflows. Usually, the calculation of cash flows is a necessary ... Read More
In finance and economics, investments have been categorized into various sectors. Independent and contingent investments are two broad subjects of investment decisions. Usually, there is no relation between independent and contingent decisions, but they may be considered two broad aspects of investments that determine the nature and characteristics of investments altogether.As the names suggest, independent investments are independent in nature, while contingent investments are related to some other types of investment.Independent InvestmentsIndependent investments are free from the influence of any other related investments. It is done singularly and executed for the benefit of the firm undertaking the investments.Independent investments may ... Read More
Delta is the measure of price movement of an options contract when the value of the underlying stock moves ${\$}$1 in value. Many people would assume that the value of an option will also move ${\$}$1 when the value of the underlying stock moves ${\$}$1. However, this is not true. As the cost of an option is much lower than the collective value of the underlying, the value of an option will change less than ${\$}$1 when the price of the underlying changes ${\$}$1.Call Options have Positive DeltaUsually, calls have a positive delta. For example, if the value of delta ... Read More
There is always an inherent risk in all kinds of investments and options contracts are no different. When a trader invests money in options, he can be either a risk-taker or a risk-averse investor.Risk Neutrality is a term used for traders who are indifferent to the risks of losing money. They just consider the final outcomes of the investments without taking care of what the other options of the investments are. Obviously, the gains for risk-neutral investors are higher, but the risk of losing money is also proportional to the risks taken by the risk-neutral traders.The term "risk-neutral" is the ... Read More
Hedging is a popular way to protect investments. It helps in mitigating risks and provides optimum exposure to risks. When a portfolio is hedged, it is often required by the investors to know about the portion of the total portfolio that is risk protected. This is where the hedge ratio comes in.In general, the hedge ratio is the ratio of the value of the investor’s open position to the overall position of the portfolio. In other words, the hedge ratio is the ratio of the open position to the overall position with a hedge to the total size of the ... Read More
Capital Budgeting is the process of evaluating, checking, and implementing a large-scale project that requires a significant amount of money. Capital budgeting may be required in the acquisition of land and building, purchase of machinery, and marketing a new product of the company. The large-scale money spent in executing these decisions is called capital expenditure.Budgeting is a process of maximizing profits by allocating money to the appropriate project and managing the project as and when it requires attention.Capital Budgeting ProcessThe following five steps are necessary in Capital Budgeting −Project Identification and GenerationThe first step of the capital budgeting process is ... Read More
There are many options strategies that a trader can apply while dealing in stock options contracts. One such option strategy is the Calendar Spread where selling an option and buying one takes place at the same time. The option that is sold is usually short term, while the one bought is a longer-term call or put option. Needless to say, a calendar spread requires the options to be of the same strike price and have the same underlying assets.A calendar spread strategy is utilized when there is no movement in the market or when there is no movement to hedge ... Read More