100%(1)1 out of 1 people found this document helpful
This preview shows page 1 - 3 out of 4 pages.
CHAPTER 9NET PRESENT VALUE AND OTHER INVESTMENTCRITERIA9.1.Net Present Value.AThe Basic IdeaNet present value – the difference between the market value of an investment and its cost. Estimating cost is usually straightforward; however, finding the market value of assets can be tricky. The principle is to find the market price of comparables..BEstimating Net Present ValueDiscounted cash flow (DCF) valuation – finding the market value of assets or their benefits by taking the present value of future cash flows, i.e., by estimating what the future cash flows would trade for in today’sdollars.9.2.The Payback Rule.ADefining the RulePayback period – length of time until the accumulated cash flows equal or exceed the original investment.Payback period rule – investment is acceptable if its calculated payback is lessthan some prespecified number of years..BAnalyzing the Rule-No discounting involved-Doesn’t consider risk differences-How is the cutoff point determined?-Bias for short-term investments.CRedeeming Qualities of the Rule-Simple to use-Bias for short-term promotes liquidity
.DSummary of the RuleAdvantages:Easy to understandAdjusts for uncertainty of later cash flowsBiased towards liquidity