Slides for Week Five AcF100.pdf

# Slides for Week Five AcF100.pdf - AcF100 Workshop Week 5...

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AcF100 Workshop Week 5 Jiali YAN Email:[email protected] Department of Accounting and Finance Lancaster University Management School February 16, 2017 Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 1 / 14

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Question1 Create an example to illustrate why the internal rate of return can lead to faulty decisions when deciding which one of two different sized projects should be selected. Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 2 / 14
Question1 Create an example to illustrate why the internal rate of return can lead to faulty decisions when deciding which one of two different sized projects should be selected. For example, you have a project A which needs initial investment of \$1 and has a rate of return 100% and another project B which requires initial investment of \$1000 and has a rate of return 10%. Which one will you choose? Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 2 / 14

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Question1 Create an example to illustrate why the internal rate of return can lead to faulty decisions when deciding which one of two different sized projects should be selected. For example, you have a project A which needs initial investment of \$1 and has a rate of return 100% and another project B which requires initial investment of \$1000 and has a rate of return 10%. Which one will you choose? Although project A has a larger rate of return than project B, when we compared NPV, we can find that NPV A = 1 which is far less than NPV B = 100 Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 2 / 14
Question1 Create an example to illustrate why the internal rate of return can lead to faulty decisions when deciding which one of two different sized projects should be selected. For example, you have a project A which needs initial investment of \$1 and has a rate of return 100% and another project B which requires initial investment of \$1000 and has a rate of return 10%. Which one will you choose? Although project A has a larger rate of return than project B, when we compared NPV, we can find that NPV A = 1 which is far less than NPV B = 100 Remember, we are ultimately interested in creating value for shareholders, so the option with higher NPV is preferred, regardless of the relative returns. Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 2 / 14

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Question2 If it is generally agreed that net present value is the best overall method of analyzing an investment, then why should any other method ever be used? Jiali YAN Email:[email protected] AcF100 Workshop Week 5 February 16, 2017 3 / 14
Question2 If it is generally agreed that net present value is the best overall method of analyzing an investment, then why should any other method ever be used? Basically, this question asks you about the advantages of other investment criteria like Payback period rule, Internal rate of return and Profitability index:.

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