Finance and Investment Essay Example | Topics and Well Written Essays - 1500 words

Finance and Investment - Essay Example Based on the given information, it appears that all projects are viable because of the positive NPV. In selecting the best project, the highest NPV has to be considered. In this situation, Project B is expected to provide more gains. Its NVP is more than double compared to the NPV of Project A. This means that benefits generated by Project B are twice greater than Project A. In practice, there are several aspects that can affect the determination of the coefficients. First, the inflation rate is one of the indicators used to identify the coefficient. Basically, considering the inflation rate changes the value of the principal as time progresses. Usually, the interest rate changes the amount that is expected to be gained from an investment when the benefits of the venture are realized in an installment basis. Second, the interest rates are also valuable aspects in determining of the coefficient. This happens when the project is financed by debt. It is imperative that the interest rate will serve as factor. A. Usually, senior executives view the different valuation methods to be similar. The most extensively used among the schemes is the Discounted Cash Flow (DCF) because of its inclination to be flexible and accurate. Some instances, however, suggests that several aspects affect the precision of the forecasts. Benchmarking the methods used by the company to its competitors is a viable scheme to arrive at more accurate predictions. The process when correctly manifested enables the company to determine mismatches in performance and strategically determine its position in the industry. Using multiples analysis provides insights that contribute in creating value in the industry. Multiples analysis is often miscomprehended and misused. Several analysts have failed to consider minor details that have great impact on the end result. Given this limitation, the companies can address the deficiency through meticulous designing of the multiples analysis. A prominent design was developed by Credit Suisse First Boston (CSFB) which tracks the stock movements among US firms. Another important problem observed in multiples analysis is that the method results to several varying conclusions. Overall, multiples analysis remains as an important component of DCF which accurately determines the future gains of investments. B. One of the main uses of multiples analysis is on predicting the price of stock markets. It assumes that the same prospects apply to the firm being studied. This appears to be limited because such has never been the situation for some firms. Using the same prospect makes the forecasting limited. In effect, it will difficult to arrive at an accurate result. In addition, it has been detected that the method tends to provide unexpected difference. In forecasting, the analyst draws conclusions that will like be observed. Multiples analysis becomes problematic because analysts fail to recognize the important differences after the results have been obtained. Amidst the use of multiples in DCF, its