cheat sheet 2 copy.docx - NPV is the net present value of...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
NPV is the net present value of the project’s cash flows The NPV Decision Rule (assume resources are unlimited) - For independent projects, accept a project if NPV>0. - For mutually exclusively projects, take project with the highest NPV. Advantage of NPV rule: -Recognize the time value of money. -Depends solely on the forecasted cash flows from the project and the opportunity cost of capital. -Provides an indicator of increase in firm values in dollar terms. Payback period is the number of years it takes before the cumulative forecasted cash flow equals the initial investment. Payback decision rule: Accept a project if its payback period < some specified cutoff period. Disadvantage of payback rule: -Ignore time value of money ( à “discounted payback”) **Can use discounted payback for TVM but still has issues due to cutoff date and unreliable bc might have negative NPV after cutoff -Ignore all cash flows after the specified cutoff if non-standard -Ignore whether project creates value to firm (NPV > 0 or NPV < 0) -Biased against good long-term projects, such as R&D projects Why do many companies continue to use it? (57% of CFOs) - Simplest way to communicate an idea – everyone can understand it. -Managers opt for projects with short paybacks (w/ limited capital) IRR is rate of return that the project earns on its initial investment IRR of a project is the discount rate that makes the NPV equal zero The IRR Decision Rule (assume resources are unlimited) - independent - accept a project if IRR > r - mutually exclusive - take the project with the highest IRR For standard and
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern