Paper Must Have The Correct In-Text Citations Listed For The

Paper Must Have The Correct In Text Citations Listed For The Reference

Paper must have the correct in-text citations listed for the references and APA formatted: Prepare a two page paper that addresses the following points: Discuss the advantages of net present value versus the internal rate of return. Use the Internet and/or Ashford University Library and/or Mergent Online to look up and describe the cash payback method. Explain the advantage of a discounted cash flow method of analysis. Analyze at least three problems that may arise over a long time frame by using the internal rate of return method. Explain how these terms can be utilized to calculate the value of an entrepreneurial venture. Submit your two-page paper (not including title and reference pages). Your paper must be formatted according to APA style as outlined in the approved APA style guide, and you must cite two scholarly sources in addition to the textbook.

Paper For Above instruction

The evaluation of investment projects is a fundamental aspect of financial management, particularly when assessing startup ventures and ongoing business operations. Two widely used methods for investment appraisal are the Net Present Value (NPV) and the Internal Rate of Return (IRR). While both aim to measure the profitability of investments, they have distinct advantages and limitations. This paper explores the benefits of NPV over IRR, describes the cash payback method, examines the advantages of discounted cash flow analysis, discusses problems with IRR over extended periods, and elucidates how these financial metrics can inform the valuation of entrepreneurial ventures.

The Net Present Value (NPV) method calculates the difference between the present value of cash inflows and outflows associated with a project, using a specified discount rate. One of its primary advantages over the Internal Rate of Return (IRR) is its ability to incorporate a specified cost of capital directly into the analysis, providing a clear indication of whether a project adds value to the firm (Ross, Westerfield, & Jaffe, 2020). Unlike IRR, which provides a rate of return without a benchmark, NPV offers an absolute dollar amount, making it easier for decision-makers to determine whether an investment meets their financial criteria. Additionally, NPV can accommodate mutually exclusive projects and provides consistency when comparing projects of different scales or durations, thus offering a more reliable basis for investment decisions.

The internal rate of return is the discount rate at which the present value of cash inflows equals the present value of cash outflows, resulting in an NPV of zero. While IRR is popular for its simplicity and intuitive appeal, it has notable limitations. The cash payback method, often used in conjunction with IRR, measures the time required to recover initial investment through cash inflows, emphasizing liquidity rather than profitability. According to Mergent Online, the payback period is a straightforward tool used by companies to assess risk, although it does not consider the time value of money (Mergent Online, 2023). The main advantage of the discounted cash flow (DCF) approach, which underpins both NPV and IRR, lies in its capacity to consider the time value of money—recognizing that cash received today is worth more than cash received in the future (Damodaran, 2012). This approach enables more accurate valuation of long-term projects and investments, especially critical for entrepreneurial ventures with uncertain future cash flows.

However, using IRR over a long time frame introduces several challenges. Firstly, the multiplicity of IRRs can occur in projects with non-conventional cash flows, leading to ambiguity in interpretation. Secondly, IRR assumes reinvestment of interim cash flows at the same rate, which may not be realistic; high IRRs might overestimate project attractiveness if reinvestment cannot be achieved at similar rates. Thirdly, IRR fails to account for scale differences, meaning a small project with a high IRR might be less valuable than a larger project with a lower IRR but higher overall return (Brealey, Myers, & Allen, 2019). These issues complicate the long-term use of IRR, especially for innovative entrepreneurial ventures where cash flows may be unpredictable and subject to volatility.

Understanding and leveraging these financial tools can significantly enhance the valuation of entrepreneurial ventures. NPV provides a dollar estimate of value added, which is crucial for startup valuations where tangible benefits are often uncertain. IRR, though more abstract, helps entrepreneurs and investors understand the rate of return potential, aiding in strategic planning. When used together, these methods offer a comprehensive picture: NPV quantifies value creation, while IRR offers rate-of-return insights. Combined, they inform investment decisions, resource allocation, and risk assessment, essential for guiding entrepreneurial growth and sustainability (Brigham & Houston, 2021). Proper application of discounted cash flow analysis, including considerations of long-term risks and cash flow variability, can significantly improve the assessment of entrepreneurial ventures’ viability and potential for success.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of corporate finance (13th ed.). McGraw-Hill Education.
• Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (2nd ed.). Wiley Finance.
• Mergent Online. (2023). Corporate financial analysis tools. Mergent Inc.
• Ross, S. A., Westerfield, R., & Jaffe, J. (2020). Corporate finance (12th ed.). McGraw-Hill Education.
• Brigham, E. F., & Houston, J. F. (2021). Fundamentals of financial management (15th ed.). Cengage Learning.