Finance Management Articles - Page 38 of 96

Companies often need to make investment decisions at some specific points in time. Incremental cash flow helps find the better project to invest the money in, as it helps the companies generate incremental income from the investments.In general, investors and lenders are interested in finding out the future cash flows that keep the businesses growing. If the incremental cash flow is calculated, they can be more or less sure if the project will churn out profits or it will be a loss-making project.What is Incremental Cash Flow?Incremental cash flow is the cash flow that a company acquires when it takes ... Read More

What is Equity Cost of Capital?The "cost of equity" is related to the shareholder’s return. In general, the Cost of Equity is the shareholder’s required rate of return that makes the market value of share equal to anticipated dividends. The cost of equity, in other words, is the expense of capital a company pays to its shareholders for the investment they have provided in the business.Equity capital can be raised both internally and externally.In case of internal cost of capital, the companies raise capital through retained earnings.In case of external cost of equity, the companies earn the investment by issuing ... Read More

The Accounting Rate of Return is an annual percentage of the average net income an asset is estimated to generate divided by the average capital cost. It is used in capital budgeting decisions in situations where companies decide whether to invest or not in an asset-based on net future earnings compared to the capital cost.The Accounting Rate of Return is a measurement of future profitability more than the assessment of risks. It deals with the required rate of return which is the minimum return an investor seeks than the risks associated with the particular investment.The Accounting Rate of Return is ... Read More

To check the feasibility of projects, investors and companies normally use the Net Present Value (NPV) and the Internal Rate of Return (IRR) methods. Each of these two techniques has different assumptions, including the assumption of reinvestment rate.Generally, NPV doesn’t have a reinvestment rate assumption, while IRR does have it. The reinvestment rate assumption, therefore, changes the IRR’s overall outcome.Net Present ValueNPV is tool companies use for capital budgeting decisions. NPV is calculated by determining the expected cash outflows and inflows for a project and discounting them with a discount rate. NPV has more inputs and flexibility in comparison to ... Read More

The Pure Play Technique is a frequently used method of determining the cost of a divisional project. It involves the following major steps −Identifying Comparable FirmsThe first step in the Pure Play Method is to find identical firms with similar features. In the real world, it is impossible to find exactly similar firms, as even the most resembling firms have different features. However, it is not impossible to find two or three firms that have quite similar features, and hence finding two to three firms with similar features (not exactly similar) is sufficient for the process.If no matches are found, ... Read More

Opportunity Cost is a term widely used in Finance and Economics. It is not found in Accounting because it is not an explicit cost paid out of the pocket. Rather, it is an implicit cost which is why Accounting does not include it. Opportunity cost is related to investment decisions. In Finance, it is often used when alternate use of money is required.Alternate Uses of MoneyThe opportunity cost of capital usually represents the alternate uses of money.For example, let's suppose an investor has INR 100, 000 in his hand and he wants to invest the money in the stock market. ... Read More

The terms "conventional projects" and "non-conventional projects" are derived from conventional and non-conventional cash flows. Therefore, it is necessary that we understand the difference between conventional cash flows and non-conventional cash flows.Conventional Cash FlowsConventional cash flow is a series of cash flows that go in one direction over time. If the initial flow is an outflow, then the next flows will be followed by successive periods of cash inflows.This type of inflows can also occur so that if the preliminary transaction is a cash inflow, it will be followed by a series of cash outflows. Accordingly, the mathematical notation would ... Read More

Businesses always need to know how much inventory is left and what is its worth. This is especially applicable to eCommerce firms. It is therefore of prime importance to calculate the inventory with the right inventory tracking method to manage the eCommerce demands and earn profits from them.There are many variables in the calculation of inventory and hence keeping track of it may look gruesome. Fortunately, there are ample inventory tracking solutions to help businesses in continuing their operations. The "weighted average cost" is one of them.What is Weighted Average Cost (WAC)?"Inventory weighted average" or the "weighted average cost" is ... Read More

The payback method is a non-DCF method for investment evaluation. However, it is quite popular among economists and financial managers due to some virtues mentioned below −SimplicityAs the time value of money and discounted cash flow are not considered, payback is a simple standalone tool for the evaluation of investments. Also, payback is quite easy to calculate and understand which is why it can be used by non-financial managers too. Simplicity in calculation and use is probably the most notable virtue for the popularity of the payback method.Cost-effectivenessThe payback method is not only simple but is also quite cost-effective to ... Read More

Both "cash flow" and "profit" are vitally important for businesses and there are distinctions and notable differences between the two. As a business owner, taking cash flow for profit can be a serious mistake. While a company can be highly profitable with a little cash flow, some companies may have high cash flows yet are less profitable.Cash FlowCash flow in brief is the amount of money that comes into, through and out of the businesses over a set period. Credit from suppliers, money owed to debtors, and cash in bank are not included in cash flow. It is completely concerned ... Read More