Understanding the Intricacies of Discounted Cash Flows and How It’s Effects on Day to Day Life

Post in statistics assignment

Being a finance manager is a tough task and the major part of your responsibility will comprise of the following tasks:

  1. Allocation of organizational resources amongst the production and labor departments in the organization
  2. Ensuring that there is proper allocation of resources among the departments and that there is no excess or deficiency of resources.
  3. Ensuring that the resources are procured in an appropriate manner, at the right time, in the right quantity and at the right price.

One of the perhaps most difficult task as a finance manager is choosing the right projects for investing the organizational financial resources in. When we draw a MCC-IOS curve, we study it for the main reason to understand the projects we can invest in at the appropriate MCC (Marginal Cost of Capital) in accordance with the IOS (Investment Opportunity Schedule). The MCC is the rate of interest charged on every last dollar raised while the IOS curve represents the various investments available in the market.

Therefore, whenever we have to invest in a project, we need to study it in details to understand the benefits we will enjoy from such investments. The most common way to study this is using the Discounted Cash Flows method.

We all know that when we invest our money in a project we get periodic payments from the investment. These payments will generally span over a number of years. So in order to understand the value of such payments at the present point of time we use Discounted Cash Flow method.

Evaluating a project using Discounted Cash Flow Method

There are two ways in which you can use Discounted Cash Flow methods to understand how you can evaluate a project. They are as follows:

  • Net Present Value or the NPV method

The Net Present Value method is most frequently used when it comes to evaluation of a project. It equates the future payments to their present value. To explain this more simply, they tell you the value of the money you will be receiving in the future, at their present value. Thus, you can find their net worth by subtracting initial investment made from the amount received at the present values.

The formula we use to derive at the Net Present Value of a project is as follows:

NPV = Present Value of Cash Inflows – Present Value of Cash Outflows

As most of the projects involve an initial outflow of resources the formula can be reframed as:

NPV = Present Value of Cash Inflows – Initial Investment

Having a positive NPV means the project will give you a return more than the initial investment. Thus, you can say that the project is viable for the organization. When a project has a Net Present Value equal to zero it means that the project will not give a return in excess of the investment made. To word it in a better manner, it means that the project will neither make a profit or a loss.

Meanwhile if you have a negative Net Present Value it means that the project is not viable as it won’t be able to give a return and might end up making a loss for the organization.

  • Internal Rate of Return or the IRR method

The Internal Rate of Return method is another method used to evaluate a project. It is an interest rate at which the Net Present Value of all cash inflows and outflows is equal to zero. It is also assumed that the IRR is the reinvestment rate of cash inflows as they are received.

Usually, organizations have a required rate of return from their various projects. And IRR is compared with such rates of required return to evaluate the attractiveness of the various projects.

The formula we use to calculate the NPV of a project is as follows:

Outflow = Inflow or,

Initial Investment = CF0 + CF1/ (1+R) + CF2/ (1+R)2+……. +CFn/ (1+R)n

Here R stands for the Internal Rate of Return.

The inflows and outflows are equated at a rate of interest represented by R such that the Net Present Value of the project will be zero.

The Net Present Value method versus the Internal Rate of Return method

Given the two ways used to measure the attractiveness of a project, there can arise a conflict between the two. For example, if we use both NPV and IRR to evaluate the attractiveness of a project, we can get conflicting results. In such a scenario NPV is given precedence over the IRR method.

The reasons why we choose NPV over IRR in cases of conflicts are as follows:

  • In the IRR method, they assume a single rate of discount at which the cash inflows are discounted. But in real life, there may be different rates of discount in different years. Thus, it is far more easy to use NPV in cases there are a number of different rates of discount for any project.
  • In a project, there is no consistent pattern of cash inflows and outflows. This results in more than one IRR as the cash flows pattern changes. This can lead to widespread confusion when it comes to measuring the attractiveness of a project.
  • IRR does not take into account the size of an investment. For example, when we calculate the IRR of a project where the investment is $2 and the cash inflow is $4. The IRR will be greater than the IRR of a project with an investment of $1 million and a cash inflow of $2 million.

Even though NPV is far more practical than IRR, we still use IRR due to the simplicity of the reporting standards. And it is far easy to interpret too and lacks any assumptions.

Learn How Statistics Can Help Us in Day to Day Life

So, most of you have already studied statistics at some point or the other. Since, High school, you have been studying statistics and applying the same in some way or the other in your daily lives.

Statistics has a common definition, which remains the same, no matter how you wish to represent it. “It is a form of mathematical analysis, which makes use of quantified models, representations and survey for a set of data or real-life examples.”

The subject makes use of the study of different methods to gather, review, analyse and draw conclusions from some kind of data.

Mathematical Statistics Topics

The following are mostly covered:

  • Continuous and Discreet Distributions.
  • Basic Set Theory Notation.
  • Random Variables, Expectations and Variance.
  • Conditional Probability.
  • Univariate and Bi-variate transformations.
  • Central Limit Theorem, Laws of Large Numbers.
  • Confidence Intervals.
  • Hypothesis Testing.

There are Various Stages in the Statistical Process:

Let me tell you the steps that‘you’ or ‘I’ or anyone undertakes in a statistical study.

  1. Planning is an important part of the investigation process. Here, you will need to find out the instruments which you will be using to conduct the research. It can be surveys, sampling and interview methods. If you ever need to find out purchase behavior of consumers, you need to draw out certain survey methods and interviews, as well.
  2. Organizing the Data is the next step in the statistical process. You need to establish relationships at this stage. There are many software programs that help with this. You might have to find out the mean, median and mode.
  3. Interpretation of the data is the third step. The numbers which come about, as a result of the study needs to be converted into substantial data. On the basis of this, the planning of marketing strategies in consumer-oriented business takes place.
  4. Presentation of the data is the final step that will allow you to make the findings more relevant. You can use graphs, pie-charts, tables etc.

Important Statistics Topics That You Come Across On Daily Basis

  • The government bodies use statistics on a day to day basis. They use it to find out information about health, education, population data and more. They conduct research on government schools to find out how they are administering education. Whether or not, specific curriculum is being followed or not.
  • Science and Medicine Industry also use the data, to conduct more research work. They ty to find out from sampling data, how the human body will benefit more from new medicines.
  • Psychology is using data more in todays’ scenario. There is depression, suicidal tendencies and mental illness in a large number of people. Doctors, make use of questionnaires and try to draw inferences from the data gathered, through multiple sampling. Statistics has become a very important part of our lives.
  • In the Education Sector, teachers welcome researchers into the classrooms to educate the students and find out more about improved methods of pedagogy.
  • Multinational Companies, make us of the statistics research and analyst methods to come up with more new products.

So, you can see the repercussions which statistics can have on our daily lives.

Major Statistical Measures That We Use

Nowadays, we are all using Mean, Median and Mode, in our daily lives.

Mean – is the mathematical average of a certain amount of data. You add up all the numbers and divide it by the number of data.

Median is the middle value in a set of data.

Mode refers to a statistical data, that occurs very frequently in a set of numbers.

Let us move on to the tougher topics in Statistics:

Basic Set Theory Notation

This is the probability theory which uses language of sets. Probability is measured and calculated for sets. Here, we need to discuss set notations, definitions and operations to introduce countable and uncountable sets.

You can also find some weird symbols and it is an irreplaceable part of set theory. The usage is most importantly, related to mathematics. Mathematical structures like graphs, rings and vector spaces are explained through the set theory.

The theory of mathematical relations can be explained through set theory. It is also a foundation system for mathematics. It is a major area of many inter-related mathematical fields as well.

Problem Areas in Statistics

You may face some problems in mathematical derivations, if you have a fear of mathematics. And, you need to stop memorizing the formulas and concepts. Get the foundation clear. You all try to follow the rule of the thumb in applying the formulas to real-life situations.

Then, there are irrelevant teaching methods in today’s scenario. Teachers do not follow the updated laws of education. There are too many students in the classroom and the teacher is not able to give individualized attention to all. The problems remain unsolved and create problems for the students in home-study or during the examinations.

How can you take help from experts?

In order to take help in statistics, you can access the online education industry. You can get assistance on any type of subject, apart from statistics. The experts are industry big-shots who have knowledge to manage education, pedagogical procedures to make you understand and industrial expertise.

The experts on the platform have been selected after stringent tests and have the best degrees in mathematics, statistics, English and other major subjects.  You can get help from tutors. They have stringent proof reading and checking procedures, before they submit the assignments and other deliverables.

If you take assistance from experts, you can clear your concepts, get help in assignments and also learn for examination excellence. So, please go ahead and take assistance.

Author Bio

MajaKazazic is a graduate from Stanford University and is also a teacher on online platform. He has almost 7 years of academic experience and follows a customized approach to teaching students, of all levels. He also has an MBA from Harvard University. You can trust him, with your statistic assignments and other related subjects in the same genre.