Principles of Finance 1 Term Paper Example | Topics and Well Written Essays - 500 words

Principles of Finance 1 - Term Paper Example The risk and return of the proposed investment project requires a study of the project’s cash flows. To analyze the profitability of the investment project, one method that may be done is to make use of the net present value (NPV) method. NPV is the difference between the present value of cash inflows and the present value of cash outflows. A positive NPV means that the project is acceptable while a negative NPV means that the project is not profitable. Once a decision has been reached to undergo the project, the next step is to determine the sources of financing and establish the appropriate financing mix. Here lies the decision on whether to use debt or equity to maximize the value of the investment. Also, the source of financing should match the nature of the asset being financed. If a decision is made to finance the project through debt, it must also be determined whether it will be a long-term debt or a short-term debt. Long-term debt can be a term loan with a bank or a b ond issuance. A bond is like a loan because it is also a debt instrument. It is issued for a period of more than a year with the purpose of raising capital for borrowing. Its difference from a term loan is that it is generally offered to the public rather than to a single lender or a small group of lenders.