Good Long-Term Financial Projections Essay Example

- A firm that does not have access to capital markets is using equity or owner’s money to finance its projects. This means that there is no fixed charge on the investment that is being ploughed in the business. There is also fixed monthly payment for the use of the funds. It is the reason why this firm will measure the profitability of its projects using the payback period rather than the NPV which takes into account the cost of borrowed funds.
- A mutually exclusive project differs from an independent project in terms of the size and timing of its cash flow. An independent project’s cash flows are not affected by the other projects. The mutually exclusive project’s cash flows are affected by other projects as well. Since, all projects that have a positive NPV and a higher internal rate of return (IRR) should be accepted. For mutually exclusive projects, only those projects with positive NPV should be selected. IRR should only be a second criterion for selecting projects, but it takes into account the reinvestment risk and does not show a complete picture.
- Sunk costs are those costs that cannot be recovered and are necessary for starting the business. Opportunity costs are those costs that the company can earn by investing in other projects. Sunk costs and opportunity costs are not taken into account when measuring the projects using NPV and IRR. The reason behind this is the fact that these costs are only theoretical and they cannot be measured with the degree of certainty. Hence, it is only a theoretical figure and is not taken into account for measuring the profitability of the project.