Chapter_14-2Captial_Budgeting_Decions

Chapter_14-2Captial_Budgeting_Decions - Chapter 14-Captial...

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Chapter 14-Captial  Budgeting Decions
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Agenda o Introduce IRR o NPV decisions and two or more choices o NPV with uncertain future cash flows
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Internal Rate of Return o The internal rate of return is the rate of return from an investment over its life. o IRR is the discount rate that yields a net present value of zero for an investment. o In our problems assume that cash flows are even over time o Factor for IRR= Investment Required / Net annual cash inflow o Once you have the factor look up the rate that is closest to the factor for period n.
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EXAMPLE: Decker Inc. can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. The machine will have a 10-year life. What is the internal rate of return? When the future cash flows are the same every year, as in this example, the internal rate of return can be found by computing the “Factor of the internal rate of return” as follows: Then find the closest factor from the annuity chart. Investment required
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Chapter_14-2Captial_Budgeting_Decions - Chapter 14-Captial...

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