analystneedstocarefullyweighthestrengthsandorporatestherequiredrateof
return(i.e.risk)oftheproject.
[RememberINVERSErelationship!]
ThereareFourMethodsdiscussedinChapter11.An *
*
*
Chapter11:ProfitabilityIndex&IRR
POW#7SimilarProblemforNPV&
IRR
Chapter12:Part1Discussion
Includesallcashflowsthatoccur
duringthelifeoftheproject.
2)Considersthetimevalueofmoney
3)Inc
weaknessesofeachmethodbeforemakingalongterm
capitalbudgetingdecision.
*
*
*
*
PaybackPeriod
NetPresentValue(NPV)
ProfitabilityIndex(PI)
InternalRateofReturn(IRR)
350,000
CFj(Time0)
75,000 CFj(Time16)
[Flash0;CF]
[Flash1;CF]
6ShiftNj
[Flash1;N]
88,500 CFj(Time79)
[Flash2;CF]
3 ShiftNj
[Flash2;N]
125,000 CFj(Time10)
[Flash3;CF]
16
I/YR
Shift
NPV
Solution: NPV@16%=$36,270.65
POSITIVENPVsaysweACCEPTtheproject.
TocalculatethePI,computetheNPVwhenInitialOutlay(IO)=0
0
CFj(Time0)
[Flash0;CF]
75,000 CFj(Time79)
[Flash2;CF]
3 CFj(Time16)
[Flash1;CF]
6ShiftNj
[Flash1;N]
88,500 ShiftNj
[Flash2;N]
125,000 CFj(Time10)
[Flash3;CF]
16
I/YR
Shift
NPV
Solution: NPV@16%=$386,270.65
PI:NPV/IO=386,270.65/350,000=1.104
1.104>1
ACCEPTProject
500,000
CFj(Time0)
[Flash0;CF]
145,000 CFj(Time16)
[Flash1;CF]
6ShiftNj
[Flash1;N]
158,500 CFj(Time79)
[Flash2;CF]
3 ShiftNj
[Flash2;N]
295,000 CFj(Time10)
[Flash3;CF]
18
I/YR
Shift
NPV
Solution: NPV@18%=$191,175.34
POSITIVENPVsaysweACCEPTtheproject.
TocalculatethePI,computetheNPVwhenInitialOutlay(IO)=0
0
CFj(Time0)
[Flash0;CF]
145,000 CFj(Time16)
[Flash1;CF]
6ShiftNj
[Flash1;N]
158,500 CFj(Time79)
[Flash2;CF]
3 ShiftNj
[Flash2;N]
295,000 CFj(Time10)
[Flash3;CF]
18
I/YR
Shift
NPV
Solution: NPV@18%=$691,175.34
PI:NPV/IO=691,175.34/500,000=1.382
1.382>1
ACCEPTProject