The Use of Financial Tools in the Management Process Term Paper

The Use of Financial Tools in the Management Process - Term Paper Example Investments have related interest expense amounts. The same return shows the interest rate that is used to generate a resultant zero net present value. The present value is arrived at by using an interest rate in the computation. The annual or periodic cash inflow is collected. Examples of inflows of cash are: ? 260 for year 1, ? 280 for year 2, ? 250 and for year 3. The interest rate is given. The periodic or annual inflows of cash are multiplied by the present value factor (interest rate). The result of the multiplication activity is the present value amount of the periodic inflows of cash (Hilton, 2011). To computation of the rate of internal return, the present values are determined. Next, the decision maker must equate the cost of the investment as the total inflows of cash. Subtracting the two accounts, the net present value is nil (Daft, 2011). Next, the internal rate of return can be easily computed (Sollenberger, 2008). The total present value of net inflows of cash is divid ed by the total inflows of cash. The computation outcome is traced is plotted on the net present value table. The decision maker searches for the column where the division result falls. Further, the internal rate of return (IRR) tool is used to compare the financial performance of two or more entities. For example, the internal rate of return of Reagan Company is 6 percent. Further, Washington Company has an internal rate of return of 8 percent. Comparing the two companies’ internal rate of return, Washington Company has a better internal rate of return. The company with a higher internal rate of return output shows a financially better business image (Gitman, 2008). Compared with the net present value decision-making tool, the internal rate of return is a better management tool. Most decision makers prefer the internal rate of return. The internal rate of return places importance on times’ effect on money, cash flows. Time value analysis includes placing a higher value on the earlier collection or payment of cash amounts over the same amount of cash collected at later years.