The payback period is the time it takes for a project to recover the investment cost. For example, if you invest $100 and the returns are $50 per year, you will recover your initial investment in two years.
The NPV formula in Excel is counterintuitive at first. When I first used it, I made a simple mistake by selecting all the cash flow, including the initial investment. I learned that Excel requires you to select only the future flows and then discount the initial investment from the result, to get the accurate NPV value.
This article teaches you how to calculate the IRR (Internal Return Rate) using Excel. The Excel function to calculate the IRR is “IRR” and it’s really simple, since it only takes the range that contains the flow of funds, including the initial investment.
Financial planning is a process that evaluates the situation of a business in relation to it’s financial resources and needs and determines how to manage the liquid assets, taking the future inflows and outflows of funds into accounts.
Financial Resources are all liquid assets of an
- Cash.
- Short term bank deposits.
- Liquid financial investments, like stocks and bonds.
Financial resources are used to carry out the main operations of the business, like buying goods and services, and to carry out long term investments.
Capital budgeting is a process that assess the convenience of carrying out an investment or not. If there are many profitable investments available, the capital budgeting tries to find out which one is more advisable.
An investment project is a detailed proposal of an expenditure of liquid resources, with the objective of taking actions that will lead to future profits.
- An investment project is made before the investment itself.
- An investment implies an expenditure of resources, but it doesn’t necessarily means that those resources are our own resources: a lot of investments are carried out by borrowing money.
The cash flow statement shows the inflows and outflows of cash generated and used by an organization in a given period of time.