Finance 3403 Chapter 9 - CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 9.1 Net Present Value.A The Basic Idea Net present value the

Finance 3403 Chapter 9 - CHAPTER 9 NET PRESENT VALUE AND...

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CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 9.1. Net Present Value .A The Basic Idea Net 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. .B Estimating Net Present Value Discounted 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’s dollars. 9.2. The Payback Rule .A Defining the Rule Payback 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 less than some prespecified number of years. .B Analyzing the Rule -No discounting involved -Doesn’t consider risk differences -How is the cutoff point determined? -Bias for short-term investments .C Redeeming Qualities of the Rule -Simple to use -Bias for short-term promotes liquidity
.D Summary of the Rule Advantages: Easy to understand Adjusts for uncertainty of later cash flows Biased towards liquidity

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