Found 1748 Articles for Growth & Empowerment

Profitability Index (or PI) is a method to evaluate the profitability of investment projects. It is actually a benefit to cost ratio or the ratio of the present value of cash inflows at the required rate of return to the initial cash outflows of the investment.Like NPV and IRR, PI is also a popular investment evaluation technique. However, the measurement procedure and application of the method have some differences in comparison to IRR and NPV. PI is a variation of the NPV method and requires similar computations as the NPV method.Like IRR and NPV, PI also has some merits and ... Read More

There are basically six factors that affect the value of an options contract −The value of the underlying assetExercise priceExpiration timeRisk-free rate of interestVolatilityPayments on the underlying and cost to carry onLet us take a look at each of these factors in detail.The Value of the Underlying AssetThe value of the underlying assets has a significant effect on the value of an options contract. In fact, call options can be considered as buying the underlying, while put options can be viewed as selling the underlying. Therefore, when the value of underlying goes up, the value of the call option increases. ... Read More

Capital Budgeting is a process of evaluating long-term business decisions that need large amounts of capital. It is a way to find a better deal for the growth of the business. Capital budgeting is often related to important capital decisions that impact the bottom-line of a company. It has certain characteristic features. Here are the features one by one.Large InvestmentsCapital budgeting is related to investments of large funds. It is often used to find projects that need large investments. Managers of a company identify the need for a capital budget where large sums of money are required. In capital budgeting ... Read More

The Black Scholes Method works with three different types assets −The risky assetsThe riskless assets, andThe option of the risky asset whose value has to be found.Depending on the type of assets, there are four categories of assumptions that the Black Scholes method follows, which are −Assumptions about the underlying risky assetAssumptions about the underlying riskless assetsAssumptions about the optionsAssumptions about the marketAssumptions about risky assetsThe risky assets such as stocks and bonds have the following assumptions under the Black Scholes model −Random walk − It states that the direction of a risky asset can be gauged but its direction ... Read More

Mutually exclusive investments are investments that are connected to each other where taking up one negates the use of the other investment. These investments usually serve different purposes but when one of them is undertaken, the other cannot be done. There are many examples of mutually exclusive investments, but they are primarily related to funds invested to complete different projects.Note − Mutually exclusive investments are usually for different projects. However, they may be contingent investments that are derived when an extra investment is needed to serve the major purpose.Characteristics of Mutually Exclusive InvestmentsHere are the major characteristics of mutually exclusive ... Read More

Collar Option StrategyA collar option strategy is created to diminish both positive and negative returns of the underlying assets. It can hedge the options against the volatility of the market and limit the return of a portfolio within a specified range.To do this, a protective put and a covered call option are used. Generally, it is created by holding an underlying stock, buying out-of-the-money put options, and selling an out-of-the-money call option.How does a Collar Option Strategy work?A collar option strategy is used to limit both upside and downside of an investment. It involves a long position on an underlying ... Read More

The following three important steps are involved in evaluating an investment decision −Estimation of Cash FlowEstimation of Internal Rate of Return (the Opportunity Cost of Capital)Application of a decision rule for making the choiceLet us take a closer look at each of these steps.Estimation of Cash FlowDiscounted Cash Flow (DCF) techniques address the time value of money as well as the opportunity costs, which is the cost of foregoing investment in a project for selecting another in its place. The major types of DCF include Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index.NPV is the gap ... Read More

Net Present Value or NPV is a classic economic method of evaluation of investment proposals. It is a Discounted Cash Flow (DCF) technique that considers the time value of money. NPV correctly postulates the cash flows that arise at different time periods that are comparable in terms of their present values.Steps to Calculate NPVThere are some steps that must be followed to calculate NPV. Here are the four rules that must be followed to calculate NPV correctly.Forecasting Cash Flows − This is the first step of the NPV calculation where an accurate forecast should be made about cash flows of ... Read More

The Value Additivity Principle in NPV states that the value of the total NPV of a bigger project is equal to the summation of all smaller NPVs of projects. In other words, the summation of all smaller NPVs provides the bigger NPV of an investment project. The NPV of a group of the independent projects will be equivalent to the NPV of all the independent projects.If A and B are two smaller projects, then the total NPV of the bigger project (A+B) would be −NPV (A+B) = NPV (A) + NPV (B)Value Additivity is an important principle because using it, ... Read More

Internal Rate of Return (IRR) is a popular investment evaluation method, as it offers the profitability of a project in percentage terms. The IRR criterion is also popular because it can be easily compared with the opportunity cost of capital. However, like all other investment evaluation methods, it also has some merits and demerits.Merits of IRR MethodFollowing are the merits of using IRR as an investment evaluation method −Time value of money − IRR considers the time value of money. It states that a rupee today will be worth more than a rupee tomorrow. By considering the time value of ... Read More