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Lecture8

Lecture8 - CSA 273 Lecture Introduction to Financial...

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CSA 273 Lecture: 2/01/08 Introduction to Financial Projects 1. Class Examples 2. Internal rate of return of a project A. Annual Discount Factor B. Deriving IRR (Internal Rate of Return) 3. Choosing Best Among Multiple Projects

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Definition of Financial Project A combination of costs and benefits occuring at different points in time. Negative cash flow = money paid into a project. Positive cash flow =money received from a project. Central Problem: Find which among several financial projects provide the greatest benefits.
PV of a Project Example 1: Find present value of a project which requires \$100 now and \$200 a year from now. \$500 is paid to investor 2 years from now. i =10% compounded semi-annually. Soln: Draw time -line sketch. 0 1 2 \$100 \$200 \$500 n (years) mn (periods) 2 4

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PV of a Project Method 1: Sum the present values of each cash flow. mn m i 1 FV PV - + =
Method 1: Sum the present values of each cash flow. 2

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Lecture8 - CSA 273 Lecture Introduction to Financial...

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