BA 103 Lec 8 - UGBA 103: Introduction to Finance Lecture 8...

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UGBA 103: Introduction to Finance Lecture 8 (2/25/08) MIDTERM #1 Covers chapters 1-6 2 parts: 1. Problems in back in chapter, ex. PV calculations 2. Problems based on slides 5 questions, each question 5% of ending grade 3 questions from end of chapter 2 draw on slides in class, cover material not in the questions in the book If send email about exam, will not provide any information Need to ask in presence of everyone NEED TO BRING CACULATOR! Graphing calculators are okay Need to write out all equations Show simplified formula, then fill in numbers in caculator Closed book exam, no cheat sheets Get partial credit if you don t answer questions right EXAM STARTS 8:10 SLIDES: INVESTMENT DECISION RULES (CHAPTERS 6-7) Payback IRR- internal rate of return EVA- similar to PV PAYBACK RULE PV not easy to apply Simplest popular investment decision rule Selects a time, ex. 4 years. Certain profits come back (net cash flows) which can be thought as paying back initial investment. Ex. Companies say we only take on projects that have payback 5 years or less. DIFFCULTIES WITH PAYBACK Better as way to screen investments. 1. Where did 5 years come from? Arbitrary, It could be 3 years, 4 years, 5 years. For most companies it probably comes from experience. 2. Ignores time value of money for the payments before the break-even date. 3. t see good return until 5 th year REDEEMING FEATURES Good for small projects not that important to firm Corrects for a couple of things: Issues of liquidity if get paybacks early, can turn around and use money for something else, ex. New investment Considers flexibility option (NPV can do this, but harder) Cash flows in short run easier to show than long run, so payback rule shows those easier to project

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INTERNAL RATE OF RETURN: DEFINITION (THIS SLIDE GOES BEYOND TEXT!!!!) C 0 = start of investment
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This note was uploaded on 05/11/2008 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at University of California, Berkeley.

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BA 103 Lec 8 - UGBA 103: Introduction to Finance Lecture 8...

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