Selected discussion one

Elizabeth Holden posted Dec 2, 2018 10:12 PM

Using the Net Present Value (NPV) equation helps to determine the legitimacy of a business
investment by allowing the financial analyst to see if the investment will yield a loss or gain, and
by how much. NPV is determined by subtracting the present value of cash outflows from the
present value of cash inflows (Investopedia, 2018). 
McCormick & Company should invest in a new factory in Largo, Maryland. The Net Present
Value turns out to be positive as a result of the initial investment of $4,000,000. According to the
spreadsheet, the company estimates a net cash flow of $780,000 per year for 10 years with the
purchase of the factory. The cash generated from an additional factory would increase growth
significantly enough to justify the expense. McCormick & Company would ultimately benefit
from the investment outcome by exceeding their initial investment including interest.  
In a nutshell a “return” is the money made or lost on an investment (UMUC, 2018). Financial
“risk” is defined as the possible loss of money that could occur when investing in a company,
particularly if the company has debt or their cash flow proves inadequate to meet financial
obligations (Investopedia, 2018). In evaluating investments, the terms risk and return, thus, go
hand in hand. It is essential for the analysis to evaluate the level of chance in potential risks, such
as how much money could potentially be lost if the investment fails, and how much the
investment could potentially yield in a return. Both must be considered to determine if an
investment is going to be worthwhile. Many will say that the greater the risk the greater the
return. Likewise, a substantially lower risk will also yield a more modest return (UMUC, 2018).
Considering the company estimates it can produce a net cash flow of over $700,000 yearly in
return for 10 years, the investment in this scenario seems a fairly secure risk to make.  

Discussion response
Hello Elizabeth Holden,
Great post! Net present values usually consider an investment worth by evaluating the cash
inflows and outflows. The method is straightforward and is better than the non-discounting
techniques such as payback period and the accounting rate of return in that it considers the time
value of money. Time value concept stipulates that the value of the money today is better than its
value tomorrow. Again, when using the NPV concept, I believe the investors should apply the
discounting factor that considers the level of risk in a given investment. Risk evaluation can
assist the companies and the investors to evaluate the gains and loss from a project properly.
Selected discussion two
Reyna Albores posted Dec 1, 2018 8:26 PM
Understanding the correlation between risks and returns is important during investments. A high
return is usually associated with a higher risk, whereas a low risk usually yields in lower returns
(Investopedia, 2018). This impacts investments because an investor is more likely to invest in a
company with a high return, resulting in more profit. However, a company with a high risk could
potentially lead to a more significant loss in their investment.
company’s expenses and after tax, the company’s cash inflows will be a little less than the initial
investment of $4,000,000.00. On the contrary, McCormick can purchase the new factory, but
should consider financing the new factory through the issuance of stocks or bonds.
Adding a new factory with new products will allow McCormick to expand their portfolio. The
company’s cash flow through ten years may not bring in enough cash, but throughout a lifetime,
it can produce more profit for the company. As long as the company produces positive cash flow,
McCormick should consider purchasing the new factory.
Discussion response
Hello Reyna Albores,
Great work! I like your argument about the correlation between risks and returns when
evaluating an investment portfolio. Different investment bears different level of returns and risk.
For instance, investment risk can either be high, moderate or low. Based on the type of risk some
investors prefers high risk hence are considered risk takers while others like a lower risk thus are
risk-averse. Therefore, McCormick company management must carefully evaluate the risks that
will impact the investment in the new factory for the firm to generate maximum returns. Also,
only the relevant cash flow should be used to evaluate the viability of the investment because it
considers the real earnings that are to be generated from the operation of the company.