Definition: The Modified Internal Rate of Return or MIRR is a distinct improvement over the internal rate of return that assumes the cash flows generated from the project are reinvested at the firm’s cost of capital rather that at the company’s internal rate of return. The formula to calculate the Modified Internal Rate of Return is: Where, n= no. of periods Terminal … [Read more...] about Modified Internal Rate of Return
Finance
Internal Rate of Return
Definition: The Internal Rate of Return or IRR is a rate that makes the net present value of any project equal to zero. In other words, the interest rate that equates the present value of cash inflow with the present value of cash outflow of any project is called as Internal Rate of Return. Unlike the Net present value method where we assume that the discount rate is known, … [Read more...] about Internal Rate of Return
Net Present Value
Definition: The Net Present Value or NPV is a discounting technique of capital budgeting wherein the profitability of investment is measured through the difference between the cash inflows generated out of the cash outflows or the investments made in the project. The formula to calculate the Net Present value is: Net present value = n∑t=1 Ct / (1+r)t – C0 Where, Ct = … [Read more...] about Net Present Value
Average Rate of Return
Definition: The Average Rate of Return or ARR, measures the profitability of the investments on the basis of the information taken from the financial statements rather than the cash flows. It is also called as Accounting Rate of Return The formula for calculating the average rate of return is: Average Rate of Return = Average Income / Average Investment over the life of … [Read more...] about Average Rate of Return
Payback Period
Definition: The Payback Period helps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows. The formula to calculate it: Payback Period = Initial Outlay/Cash Inflows Accept-Reject … [Read more...] about Payback Period
Capital Budgeting Techniques
Definition: The Capital Budgeting Techniques are employed to evaluate the viability of long-term investments. The capital budgeting decisions are one of the critical financial decisions that relate to the selection of investment proposal or the course of action that will yield benefits in the future over the lifetime of the project. Since the capital budgeting is related to … [Read more...] about Capital Budgeting Techniques
Capital Budgeting Process
Definition: The Capital Budgeting is one of the crucial decisions of the financial management that relates to the selection of investments and course of actions that will yield returns in the future over the lifetime of the project. Capital Budgeting Process Identification of Potential Investment Opportunities: The first step in the capital budgeting process … [Read more...] about Capital Budgeting Process
Capital Employed Turnover Ratio
Definition: The Capital Employed Turnover Ratio shows how efficiently the sales are generated from the capital employed by the firm. This ratio helps the investors or the creditors to determine the ability of a firm to generate revenues from the capital employed and act as a key decision factor for lending more money to the asking firm. The formula to compute this ratio … [Read more...] about Capital Employed Turnover Ratio
Total Assets Turnover Ratio
Definition: The Total Assets Turnover Ratio shows how efficiently the total assets of the firm are employed to generate sales. This ratio gives an idea to the investor and the creditor about how the firm is managed, and the assets are utilized to generate revenues. Ideally, the firm’s asset turnover ratio is compared with the other companies within the same industry because … [Read more...] about Total Assets Turnover Ratio
Fixed Assets Turnover Ratio
Definition: The Fixed Assets Turnover Ratio shows, how efficiently the fixed assets are used to generate sales. Simply, this ratio shows the efficiency of a firm in generating profits relative to the investments in the fixed assets. The fixed assets turnover ratio is suitable for the heavy industries where huge capital is employed in the investments such as manufacturing. … [Read more...] about Fixed Assets Turnover Ratio