It shows variancebetween the present value of cash inflows and the present value of cashoutflows for a project.
Imagine that it is2006 and research and development team of Toyota come to finance manager withtwo concepts, one is a luxury, hybrid and state of the art design. The othernew car is new car modelled on an existing car on the market with a uniquedesign. The earliest is ofcourse far costlier than the second, and obviously riskier too, since it willbe innovative idea. The next option would be safer and more likely to bring a certainreturn.But, he’s the financialmanager, and he need to approach this more analytically and with numbers. Buthow does he put all this together and decide? Well, that’s why wehave NPV to decide which project will be worth/profitable in future.(Investopedia , 2017) Strengthsof using NPV when making investment decisions § The obvious benefit of the NPV is that a future dollar is worth less than a dollartoday. In every period, the cash flows are discounted by another stage ofcapital cost.
§ Will be able decide whether the project willincrease the company’s value. The NPV computation shows the amount that the jobwill yield. § Wouldbe able to determine the risk in the market as discounted rate can be modifiedin NPV to reflect a number of aspects. § NPVhas decision making mechanism and could be able to reject the projects whichhas negative NPV.
§ Ithelps to increase companies value and profit with the good decisions. (PhD Essay, 2017) (Investopedia, n.d.) Limitationsof using NPV when making decisions § Several guesswork will be needed when it comes to company’scost of capital. A result of suboptimal investment will happen if the cost ofcapital is too low. If it is too high the company might have to give up on profitableinvestments.
§ It’s hard to use anddifficult to compute the right discount rate.§ NPV might be hard tounderstand since it’s more complicated method.§ The opportunity costof the investment which is not consider when calculating NPV.§ NPV is calculatedaccording to cash flows and the discount rate, both of which are tough to evaluationwith 100% accuracy. (Lumen, n.d.
) Non-Financialfactors that should be considered when making investments Investment appraisalis not all about financial aspects. There are non-financial aspects that plays importantpart in making any significant investment decision. § Safetyof employees and public: The effectof task on the safety and security of the company employees as well as the safetyof the society or public is a key non-financial consideration. § Availabilityof suitable project location/site selection:Place choice includes assessing the needs of a new job against the qualities ofpotential places. This shows the custom of new facility location, keeping inmind job needs. § Legal: Good executivesalways consider the results of government activities and indecisions on any jobthey want to implement. § CapacityAvailability: Size administrationis the arrangement, sizing, and monitoring of manufacturing or service capabilityto guarantee that the least performance levels specified are beaten. (Ingram, 2009) (Chinweike, 2009) Conclusion Toyota Production System is an extremely valuable methodand it helps Toyota to make more revenue.
TPS is interrelated and inter-reliantwith the Toyota’s Culture as without one of them, Toyota will not be so effectiveas today. From the above, can see that how TPS help company’s working area. Byusing it, company can function efficiently and can yield lots of revenues. It has helped the company in many ways, so many defectshave been reduced in manufacturing process, good bond with supplier, bestquality products and well-timed delivery to customers. The incorporation of these systems will offer Toyota the finest way advancingin the worldwide vehicle manufacturing as one of the key companies in the fieldand will let Toyota to be at the lead of excellence innovation in theoperations field.