Financial Management: Payback Period, Discounted Cash Flow, Accounting Rate of Return, Net Present Value, Internal Rate of Return

Financial management

Table of Contents
Introduction......................................................................................................................................2
Payback period.............................................................................................................................3
Merger and acquisition.................................................................................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

Introduction
Financial management levels to the lining organising and controlling of the financial activities in
the organisation (Bulturbayevich and et.al 2020). This report focuses on IRR, NPV, and payback
period. Besides this, price earning ration and discounted cash flow is also mentioned in this
report.
Payback period
Payback period is widely used in capital budgeting. Payback period shows the required time to
reach at the breakeven point. Payback period includes positive and negative cash flow to
calculate the break even and assist the company how much investment they have to make more
to reach at the breakeven point. As per the Thumb rule it states that shorter payback period give
more return as compared to longer payback period. One of the biggest advantages of using
payback period is that the concept is very simple and easy to adopt. It helps the company and
investor to know the return on the invested amount in how much money they will generate in the
future apart from this it also gives the information about risk which is present in the investment
Discounted cash flow
It is also one of the methods which is used for valuation and it estimate the value of an
investment which is based on its expected and predicted future cash flow (Atmadja and et.al
2018). Discounted cash flow helps in analysing the value of an investment which is present today
the value is based on projections of money which will going to generate in the future.
Accounting rate of return
Accounting rate of return as widely known as average rate of return. It is also one of the financial
ratio which is used and proffered in capital budgeting. This ratio also helps the investor to know
the rate of return on their investment. Apart from this accounting rate of return compares the
future expected price to present value. One of the biggest advantages of accounting rate of return
is that it is being used in multiple projects and provides expected rate of return for each and
individual project. Accounting rate of return to not used for long-term projects as it increases the
uncertainty of long time duration apart from this it does not consider any kind of risk in the
investment. Basically accounting rate of return provides the profitability off the investment by
evaluating the capital invested in the project. One of the biggest advantages of accounting rate of

return is that it is easy to calculate and provide accurate results to the investor and Company.
Besides this the main feature of accounting rate of return is that it measures the overall
performance and current performance of the project and gives the rate of profitability to the
investor so that they can make their decision according to the return (Brigham and et.al 2021).
This method provides a comparison of different projects to the investor so that they can select
best option which is available for them and create profit in the long run.
Net present value
Net present value provides the present value of the cash flow on the required rate of return for the
project which is compared to the initial investment. Basically net present value is the difference
between cash inflow and the cash outflow for a period of time. This is also a tool of capital
budgeting which is used to analyse and recognise the profitability of the project. Net present
value is used to compare different investment alternatives. Net present value is fully dependent
on discount rate which can be calculated from the cost of capital required. The main motive of
using net present value is to calculate the total value which is present today and it assist the
company or the investor about the future payment and expenses. Positive net present value shows
that the project is in profit and investment will provide better return to the investor and the
company (Loke, 2017). On the flip side and negative net present value shows that investor or the
company will face loss in the future. Net present value shows that whatever value of the money
is present today will not remain the same in the future it may fall down or will raise so as per the
money net present value provides better education and information to the investor so that by
seeing all the projected net present value they can make their investment decisions.
Internal rate of return
Internal rate of return is it tool and matrix which is used and financial analysis to recognise the
profitability of the investment. The internal rate of return is popularly known as discount rate
which makes the net present value and cash flow equal to zero in the analysis of discounted cash
flow. The formula of internal rate of return is similar to net present value. It shows the annual
rate of return which makes the entire net present value equal to zero (Wijesuriya and et.al 2017).
Higher rate of return shows that project is going to have high profitability and will generate more
return as compared to low internal rate of return. It is also used in selecting best project and
investment option from the available options. It helps the investor to compare different projects
and investment options and assist them to select best option for them which will provide them