The Consultant Office " TCO "

18/05/2021

What Is Internal Rate of Return (IRR)?

The internal rate of return is a metric used in financial analysis to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

IRR calculations rely on the same formula as NPV does. Keep in mind that the IRR is not the actual dollar value of the project. It is the annual return that makes the net present value equal to zero.

13/05/2021

What Is Weighted Average Cost of Capital (WACC)?

The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted . All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

13/05/2021

MUTUAL PROJECTS:

If you were to choose between two mutual projects with positive results; which one you choose? Is it the one with higher IRR or higher NPV? The answer is simply the one with higher NPV because it adds more wealth to shareholders.

11/05/2021

Capital Lease vs Operating Lease:

A capital lease (or finance lease) is treated like an asset on a company’s balance sheet, while an operating lease is an expense that remains off the balance sheet. Think of a capital lease as more like owning a piece of property, and think of an operating lease as more like renting a property. There are significant differences between a capital lease vs operating lease.

To be classified as a capital lease ; any one of four conditions must be met:

A transfer of ownership of the asset at the end of the term

An option to purchase the asset at a discounted price at the end of the term

The term of the lease is greater than or equal to 75% of the useful life of the asset

The present value of the lease payments is greater than or equal to 90% of the asset’s fair market value by using the incremental borrowing rate as a discount rate.

10/05/2021

10/05/2021

To do your own business, you first need to do an appropriate feasibility study. Your key points here are IRR, NPV , WACC and Discounted pay back period. If results appear to be positive , then you accept the project and vise versa. Post project performance valuation is also crutial.

10/05/2021

First lesson : never trust banks' interest rates!. You may be surprised by two different interest rates , one is announced and the other one is effective. Focus on the true effective interest rates.

09/05/2021

Hello everyone, please enjoy our free weekly dose of financial notes and advises.