Feasibility of Investment for Satellite Location When attempting to make a business decision, such as whether to open a satellite location, you can utilize the time value of money, net present value (NPV) and internal rate of return (IRR) in order to make a decision as to whether or not the opportunity will be profitable. The Time Value of Money, according to www.investopedia.com (2015), is “The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.” The time value of money is important because when you are dealing with inflows
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For example, if you have an inflow of money ($500) today and an outflow of money in 3 months ($500), you cannot say that you broke even because the value of the $500 that you received today is worth a different amount than the $500 in the future. You would need to see what the present value of the money is in order to determine if you were profitable. When dealing with the time value of money, you will utilize the net present value and internal rate of return. According to www.investopedia.com (2015), “the net present value is the difference between the present value of cash inflows and the present value of cash outflows. Net present value is utilized in capital budgeting to analyze the profitability of a projected investment or project, such as opening a satellite location”. Next, you will need to find the internal rate of return. According to www.investopedia.com (2015), the internal rate of return is “a metric used in capital …show more content…
The proposal states that Sara’s Cake Company will be paying $2000 per month for rent and will gross $7.00 per cake. The grocery store is going to purchase 500 cakes per month and they will sign a lease for 5 years. In addition, it will cost Sara $25,000 to build the mini bakery room. Sara’s cost of capital is 6%. Sara will begin by putting out $25,000 to build the mini bakery room in year zero. She will pay $24,000 per year for rent and have $42,000 in cake sales for a profit of $18,000 per year from years one through five. The IRR is 6%. Since Sara is making money, I believe that taking this proposal will be beneficial to her company and Sara should take the
For example, if you have an inflow of money ($500) today and an outflow of money in 3 months ($500), you cannot say that you broke even because the value of the $500 that you received today is worth a different amount than the $500 in the future. You would need to see what the present value of the money is in order to determine if you were profitable. When dealing with the time value of money, you will utilize the net present value and internal rate of return. According to www.investopedia.com (2015), “the net present value is the difference between the present value of cash inflows and the present value of cash outflows. Net present value is utilized in capital budgeting to analyze the profitability of a projected investment or project, such as opening a satellite location”. Next, you will need to find the internal rate of return. According to www.investopedia.com (2015), the internal rate of return is “a metric used in capital …show more content…
The proposal states that Sara’s Cake Company will be paying $2000 per month for rent and will gross $7.00 per cake. The grocery store is going to purchase 500 cakes per month and they will sign a lease for 5 years. In addition, it will cost Sara $25,000 to build the mini bakery room. Sara’s cost of capital is 6%. Sara will begin by putting out $25,000 to build the mini bakery room in year zero. She will pay $24,000 per year for rent and have $42,000 in cake sales for a profit of $18,000 per year from years one through five. The IRR is 6%. Since Sara is making money, I believe that taking this proposal will be beneficial to her company and Sara should take the