Internal and external value of money

Changes in the Value of Money: The Quantity Theory of Money and its Variants!

Internal and external value of money

Problems with using internal rate of return[ edit ] As a tool applied to making an investment decision, to decide whether a project adds value or not, comparing the IRR of a single project with the required rate of return, in isolation from any other projects, is equivalent to the NPV method.

If the appropriate IRR if such can be found correctly is greater than the required rate of return, then using the required rate of return to discount cash flows to their present value, the NPV of that project will be positive, and vice versa.

Internal and External Balance under Fixed Exchange Rate System

Maximizing Net Present Value[ edit ] One possible investment objective is to maximize the total net present value of projects. When the objective is to maximize total value, the calculated IRR should not be used to choose between mutually exclusive projects.

NPV vs discount rate comparison for two mutually exclusive projects. When the objective is to maximize total value, IRR should not be used to compare projects of different duration.

For example, the net present value added by a project with longer duration but lower IRR could be greater than that of a project of similar size, in terms of total net cash flows, but with shorter duration and higher IRR.

However, NPV remains the "more accurate" reflection of value to the business. IRR, as a measure of investment efficiency may give better insights in capital constrained situations.

However, when comparing mutually exclusive projects, NPV is the appropriate measure.

Internal & External Balance

Maximizing Long-Term Return[ edit ] Maximizing total value is not the only conceivable possible investment objective. An alternative objective would for example be to maximize long-term return. Such an objective would rationally lead to accepting first those new projects within the capital budget which have the highest IRR, because adding such projects would tend to maximize overall long-term return.

Max Value wishes her net worth to grow as large as possible, and will invest every last cent available to achieve this, whereas Max Return wants to maximize his rate of return over the long term, and would prefer to choose projects with smaller capital outlay but higher returns.

Max Value and Max Return can each raise up toUS dollars from their bank at an annual interest rate of 10 percent paid at the end of the year. Big-Is-Best requires a capital investment ofUS dollars today, and the lucky investor will be repaidUS dollars in a year's time.


Small-Is-Beautiful only requires 10, US dollars capital to be invested today, and will repay the investor 13, US dollars in a year's time. The cost of capital for both investors is 10 percent.Many economists debate whether the availability of internal financing is an important determinant of firm investment or not.

A related controversy is whether the fact that internal financing is empirically correlated with investment implies firms are credit constrained and therefore depend on . Most internal auditors recognize that the additional time and money required to perform tasks in a manner that external auditors can rely on is minimal.

Often, all that is required is for. Value For Money (VFM) audits can be defined as an objective, professional and systematic examination of systems and procedures that management has established to ensure: financial, human and physical resources are managed with due regard to economy, efficiency and effectiveness; and.

Internal and external value of money

The value of money is categorized into the internal and external value of money. The internal value of money refers to the purchasing power of money over domestic goods and services or otherwise the buying capacity of money. In this example, the internal value of the dollar is greater than its external value.

Let’s say the dollar depreciate in value. As a result, there is a divergence between the internal and external value of the dollar. Internal and External Balance under Fixed Exchange Rate System money market: m s = l(r) + ky; l(r) = liquidity balance, ky = transactions balance the market will find the equilibrium value of e).

Thus, an external equilibrium requires a positive relationship between government expenditure and interest rate.

Internal financing - Wikipedia