Lecture 7 & 8 - Lecture 7 8 Net present value and other...

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Lecture 7 & 8
4-2Outline1. Net present value (NPV)2. The payback period method3. The discounted payback period method4. The Internal rate of return (IRR)5. The profitability index
4-3Good decision criteriaDoes the rule take the time value of money into consideration?Does the rule adjust for risk?Does the rule tell us whether and by how much the project add value to the firm?
4-4A proposed projectYour company is looking at a new project that has the following cash flows.Year 0: initial cost, C0= $100,000.Year 1: CF1= $30,000.Year 2: CF2= $50,000.Year 3: CF3= $60,000.The applicable discount rate is 10%.
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4-7Project NPVYearCFC(0)PVNPV010000013,67413000027272.7>025000041322.3Accept!36000045078.9113674Discount rate0.1
4-8Judging the NPV ruleDoes the NPV rule take the time value of money into consideration?Does the NPV rule adjust for risk?Does the NPV rule tell us whether and by how much the project add value to the firm?
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Source: CFO.com.

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