Section4

Section4 - Net Present Value and other Investment Rules...

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Net Present Value and other Investment Rules (Chapters 5,6) Discussion Section 4 (02-05-2010)
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Outline Investment Rules (Chapter 5) Net Present value (NPV) Payback period Internal rate of return (IRR) Profitability Index Making Capital Investments Decisions (Chapter 6) Sunk Costs, Opportunity Costs, Side Effects Cash flow Inflation Definitions of Operating cash flow
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Comparing Investment Criteria Discuss the following investment rules and any potential shortcomings. What is the criterion of accepting and rejecting a project under each rule? Net Present value (NPV) Payback period Internal rate of return (IRR) Profitability Index
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Net Present Value What is NPV? NPV = -Cost + PV NPV = -Cost + Σ i=1 T C i /(1+r) I What is NPV rule? If NPV>0 then accept project If NPV<0 then reject project What are NPV shortcomings? It relies on discounting rate and cash flow which are not certain (they are estimates)
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Payback period (1) What is the payback period? Point in time when initial cash outflows are fully recovered (-$50, $30, $20, $10) What is payback period rule? A cutoff date is selected (say 2 years) If payback period <= cutoff date then project selected else project rejected What are payback period shortcomings? It does not consider timing of cash flows between payback period
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This note was uploaded on 02/08/2010 for the course ENGR 111 taught by Professor King during the Fall '09 term at UCLA.

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Section4 - Net Present Value and other Investment Rules...

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