Finance Notes - 09.26 - 9/26: IRR take the investment that...

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9/26: IRR – take the investment that has the higher return - You can get two answers though.  - Negative investment screws things up, you want lower interest rates similar to a loan  Don – laundry mat  - Invest 500 dollars in his girlfriend’s business  - The interest rate is 8 percent o What’s the IRR?  The IRR sets the net present values equal to zero  1000/(1+r) – 500 = 0  1 -r = 1000/500  R = 100% If we calculate the NPV of the girlfriend’s business is much higher than the  laundry mat Don does not have to choose between his girlfriend and business You don’t have to have one machine Don, we can put 20 machines in the laundry  mat Does that change the IRR?  No  Does this change the NPV?  What is the NPV of the girlfriend’s business o NPV = 1000/1.08 – 500 = $426 Found the NPV of the laundry mat - 1 machine laundry mat NPV = 150/(0.08  +.2) = 35.75 dollars - What if it is 20 machines
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- 20 machine NPV = 20 X 35.75 = 715 - IRR is stale in variance  - Would you rather get a 1000 % of 1 dollar, while 10% on a million - Have to choose between  two projects
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This note was uploaded on 04/02/2008 for the course UGBA 103 taught by Professor Berk during the Fall '07 term at University of California, Berkeley.

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Finance Notes - 09.26 - 9/26: IRR take the investment that...

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