Essay on "Distinguish Between Net Present Value"

Essay 10 pages (2709 words) Sources: 10

[EXCERPT] . . . .

distinguish between net present value and the internal rate of return. What are some common problems associated with analyses based on discounted cash flows.

Both net present value (NPV) and the internal rate of return (IRR) are measurements that are used in capital budgeting. Typically, they are ratios that allow analysts to determine with a new investment or expansion opportunity is appropriate, or given an investment value, if that investment will generate net income or loss for the organization. Since both methods are actual calculations, there will be a difference in the way the information is presented. NPV is calculated in currency while IRR is expressed in a percentile return (or loss). It appears that NPV is the preferred method since it calculates additional wealth and the IRR does not (Hansen and Mowen, 2010, 926).

Net Present Value, otherwise known as NPV, is an accounting term used in capital budgeting where the present value of net cash inflow is subtracted from the present value of cash outflows. Then this value is compared with projected profit ratios for the project in the future. In other words, NPV is useful, particularly to investors, because it compares the value of a dollar today vs. The value of that same dollar in the future, after taking inflation and return into account. NPV is also often used in capital budgeting by firms (Ansari, 2000).

IRR is also known as discount cash flow rate or return or rate of return, sometimes in the banking industry the effective interest rate. The use of the word "internal" in the title refers to the principal that the calculation does not incorporate any economic environmental factors. Essentially, because the IRR is more of a rate quantity, it is typically more of an indication of the efficiency, or yield, of an investment. This contrasts with NPV, which is an indicator of the value, or magnitude, of an investment. An investment, then, is considered to be positive if its IRR is greater than a pre-established minimum acceptable rate; if the investment has an IRR that exceeds cost, it adds profit to the organization ("Investment Decisions -- Capital Budgeting," n.d.). The IRR is calculated by using a formula that describes the relationship between time, cash flow, and net present value.

Sources:

Ansari, S. (2000).The Capital Budgeting Process. New York: McGraw Hill.

"Investment Decisions -- Capital Budgeting." (n.d.). FAO Corporate Document

Repository. Cited in:

http://www.fao.org/docrep/w4343e/w4343e07.htm

Hansen, D. And Mowen, M. (2010). Cornerstones of Cost Accounting. Mason, OH: Cenage.

2.Discuss the various strategic actions that can be undertaken to manage the uncertainty associated with innovation.

Modern business structures are so highly complex and competitive that the old paradigm -- improving efficiency and the bottom line, is no longer all it takes to be successful. Instead, continued reinvention of both the company's product line and industry capabilities is not only necessary, but will help decide which companies succeed and which fail. Too, because the half-life of technology is so short, radical and category breaking innovation is needed not just to compete, but to provide the global environment with positive growth (Christiensen, 2000).

Unfortunately, innovation does not always have a cogent pattern for every situation. Sometimes it is trial and error. More often than not, companies and individuals see innovation as being synonymous with efficiency, which is definitely not the case. In struggling to continually make their group more efficient, then, they often kill any chance for innovation. Goal orientation and efficiency are not the same thing. In most cases, innovation is not clean, neat, and pretty. Instead, by its very nature, it is disruptive to the patterns and procedures within an organization. Often, this disruption takes the form of dissent -- meaning that individuals prefer to go in a different direction or pattern than the status quo. The difficulty for most managers, and all levels, is to encourage dissent without feeling threatened by it. As the axiom of a wise CEO said, "I don't shoot messengers -- that's why I have them"(Horibe, 2001).

Sources:

Christensen, C. (2000). The Innovator's Dilemma: When New Technologies Cause

Great Firms to Fail. New York: Harper Business.

Horibe, F. (2001). Creating the Innovation Culture. New York: John Wiley & Sons.

3. Explain why intellectual property protection is important for companies

Intellectual property refers to creations that are made as ideas, patents, formulas, or innovations, whether produced or not. In a sense, one can view them as intangible assets -- music, literary, artistic works; discoveries and inventions; words, phrases, symbols, designs, copyrights, trademarks, trade secrets, or rights that have economic value, but may not be completely tangible. The idea of intellectual property has evolved over centuries, but it was in the 20th century that technology became so rampant that intellectual property became more commonplace (Bainbridge, 2009).

Intellectual property protection is important because, like physical property, it is a fiscal investment. The time it takes to produce an idea, or even a concept (say a drug), involves testing, numerous human resource hours, and sometimes results in a number of failures prior to any success. Thus, as an investment, it becomes an asset or "property that is created" that also provides more financial incentives for the company's balance sheet, recruitment, and future earning potential. Further, economics find that there is a positive correlation between strengthening intellectual property and subsequent economic growth within a system, particularly in developing countries that have little experience in protecting intellectual rights (Measuring the Economic Impact of IP Systems, 2007).

Sources:

Measuring the Economic Impact of IP Systems (2007). World Intellectual Property

Organization. Cited in:

http://www.wipo.int/portal/en/news/2007/article_0032.html

Bainbridge, D. (2009). Intellectual Property. New York: Pearson-Longman.

4. Describe the process of concurrent development and indicated how it can be used to help reduce product cycle time

Concurrent development, also known as concurrent engineering, is a process in which multiple departments work on the same project at the same time. Any disagreements or problems are addressed earlier in the process cycle, and the overall project is completed much sooner. This is in opposition to step-by-step, or linear process development. In the linear process, departments work on similar ideas, but "toss" ideas from department, with approvals necessary between departments prior to moving forward. This type of development take longer because disagreements, turf battles, and even confusion over strategic mission can lead to more iterations of the project before approval may be granted. Essentially, concurrent development eliminates most redundancy and allows for fewer individuals to manage the models in development. The entire process may be thought of as a leaner, more time-efficient model in that it allows for innovation, foresight, accountability and an environmental spirit to triumph (Aoyama, 1993).

Source:

Aoyama, M. (1993). Concurrent-Development Process Model. IEEE Software Archive. 10 (4):

Cited in: http://portal.acm.org/citation.cfm?id=625310

5. Explain the advantages and disadvantages of patenting

A patent is an exclusive right granted by a governing body to an inventor in exchange for the public disclosure or assignment of their idea or invention. Essentially, the patent is the right for the inventor to protect their invention or idea and to prevent others from making, using, selling or distributing the invention or idea without permission. The procedure for granting patents, the requirements placed on the patentee, and the extent of the arrangement of the patent vary greatly between countries, and are regulated by differences in international law. Effectively, a patent is a right to prevent use under circumstances, but does not give the proprietor of the patent the right to use the patented invention, if it falls within the legal boundaries of another, previously submitted, patent

6. Define product cycle time and explain how reducing product cycle times can be beneficial to a company (Gibbs and DeMatteis, 2003).

Placing patent protection on an idea or invention does allow the patent holder commercial and legal rights to use and license the invention; and allows for legal action to be taken against the organization or person who tries to use or infringe on that patent. This tends to deter infringement, and also allows the patent holder to use the patent as an asset (wealth) that may be sold. Disadvantages of patents prove equally as robust. For instance, a full description of the invention is available to anyone. After the exclusive patent period anyone can use the invention or idea without permission or compensating the patent holder. At times, the cost of the patent may out-weigh the financial advantages of the new idea or invention. Finally, some inventors may choose to capitalize on ideas that benefit the public for the greater good, rather than allowing the inventions to be used where they help society -- the patent allowing greed to overcome human need (Mueller, 2009).

Sources:

Gibbs, A. And Dematteis, B. (2003). Essentials of Patents. New York: John Wiley.

Mueller, J. (2009). Patent Law, 3rd ed. New York: Wolters Kluwer Publications.

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