Financial Management

Posted: October 17th, 2013

Financial Management






Financial Management

Year Investment Y Cashflows

($ 4000)

Investment Y. Cashflows.

($ 4000)

1 $ 1,000 $ 1,300
2 $ 800 $ 2,800**
3 $ 700 $ 100
4 $1,900** $ 0
5 $ 2,000 $ 0
 Total returns                                    $ 6,400                                                    $ 4,200


Investment Y payback period is 2 years and 11 months and 4 days. This is calculated as

$1,300 is recovered within the first year of investment whereas the remainder is recovered in the preceding period. ($4000-$1700) = $(2,800- 2,700) = 100. $2,700 split in the remaining 12 months of the second year = $ 2700/1= $ 233.33 per month in the next 11 months.

233.33*11.4=2659.96 or $ 2,700.

Investment X on the other hand recovers the amount invested in the outlined way. The first three years offer returns of a total of $ 2,500. The remaining $1500 is recovered as = $ 1500/1900* 12 = 9.47 months. Hence, it is recovered over 3 years and 9.47 months.

Thus out of the two investments, investment x accrues more returns in comparison to investment Y which ceases to bring in more returns after the 3rd year (Libby, Libby, & Short, 2004).

Other methods such as the net present value, the discounted payback period. The payback method only allows the evaluation of the period within which an investment is likely to repay the amount invested.

The use of payback method is limited because it does not account for time value of money. In addition, it does not account for inflation as it dwells on the simple return. It also does not evaluate the risk associated with a particular invested or the presence of differences in currency, which might take place when making an investment. The Net Present Value is best form of analysis because it puts into consideration the numerous factors associated with making a particular investment (Brigham, & Houston, 1998). The net present value is important and valuable because of its ability to put into consideration the presence of differences in currency values and differences. In addition, it enables the comparisons in terms of returns to be accrued to a particular investment such that an individual or an entity is able to make the perfect choice in terms of the returns.

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Brigham, E. F., & Houston, J. F. (1998). Fundamentals of financial management. Fort Worth: Dryden Press.

Libby, R., Libby, P. A., & Short, D. G. (2004). Financial accounting. Boston: McGraw-Hill/Irwin.

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