It represents yearly profits as a percentage of the initial investment: One good thing about this method is that it considers the depreciation of assets. Therefore, you would use the loan's rate as the "discount rate" in computing the net present value for the project.
This is calculated as a percentage value.
This ratio could be calculated for several similar companies and compared as part of a larger analysis. This is almost the same as Net Present Value concept. For many small businesses, this may not be a realistic assumption.
Example The following figures reflect the cost to Clear Corporation of borrowing from each external source that it is currently using.
So, the net present value allows you to find the today's value of the future net cash flow of a project. Internal Rate of Return IRR The internal rate of return is another financial analysis method that allows you to calculate the time value of money. The higher the percentage, the better the result.
It shows when the company would experience cash deficits and allows you to take corrective actions in advance by reducing the outflows, changing the time of certain transactions or borrowing the money.
If you are planning to finance the purchase and you know what the interest rate on the loan would be, you can use the rate charged on the loan as the cost of borrowing for the project. If you are taking a loan in order to finance your project, you can use the loan interest rate as the discount rate.
At first glance, the project looks profitable. Basically, due to its earning capacity, the same amount of money is worth more right now than at some point in the future.