Part 1: Min of 200 words
Use the Internet to research two (2) mutually exclusive investment projects to compare. The projects may involve any kind of investment, as long as the time frame for one (1) of the investments is a maximum of one (1) year (short term) and the time frame for the other investment is five (5) years minimum (long term).
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Part 2: Min of 150 words
Analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2) projects.
Part 3: Comment and give your opinion on the statement below. Min of 100 word.
The short-term project is focused on the cash flow that most people can see with the eye. The immediate functions of the business are reflected in the short term. A company is most dependent on long term projects because this is the foundation of the business. The business that has just advertised and hosted a huge promotion that is going to bring in immediate spike in sales is the here and now of the company. The company will benefit and see it’s capital increase. The project or the credit line given to customers is going to bring the money back in plus interest. This is the Long-Term project that supports and provides long term security to any company.
Part 4: Comment and give your opinion on the statement below. Min of 100 word.
Net present value represents the increase or loss in value by taking on a project (Accounting Explained, 2018). There are many different factors that can affect the NPV of a short-term or long-term project. Factors such as the initial investment, timing of the project, and unplanned costs are just a few of the factors that can impact the NPV of a project. The higher the cost of capital for a project the more challenging it may be to justify investing in that project. This is where using the internal rate of return can help in deciding where a short-term or long-term project is justifiable. The internal rate of return is the measure of the rate of return of a project over its lifetime (Accounting Explained, 2018). If the cost of capital for a short-term project is high but the rate of return is even higher than the project might be deemed feasible. However if the short term projects cost is higher than the rate of return that project may not be feasible. The same can be true for a long term project. When comparing a short term and long term project the NPV and IRR are two measurements that can be used to determine which project is the most beneficial for the company. In an ideal situation for any company you would want the initial investment to be low, the rate of return to be high and the project complete in the most efficient amount of time.