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Chapter9_s - Chapter 9 Net Present Value and Other...

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4/14/10 Chapter 9: Net Present Value and Other Investment Criteria Objectives: Know different investment criteria Net Present Value The Payback Rule The Discounted Payback The Average Accounting Return The Internal Rate of Return The Profitability Index
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4/14/10 22 capital budgeting Analysis of potential projects. Long-term decisions; involve large expenditures. Very important to firm’s future. Steps in capital budgeting Estimate cash flows (inflows & outflows).
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4/14/10 Capital Budgeting Example You are reviewing a new project and have estimated the following cash flows: Year 0: CF = -165,000 Year 1: CF = 63,120; NI = 13,620 Year 2: CF = 70,800; NI = 3,300 Year 3: CF = 91,080; NI = 29,100 Average Book Value = 72,000
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4/14/10 Net Present Value The difference between the market value of a project and its cost Decision rule: A positive NPV means: NPV = 9-4
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4/14/10 Payback Period How long does it take to get the initial cost back in a nominal sense? Decision Rule: Assume we will accept the project if it pays back within two years. 9-5
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4/14/10 Discounted Payback Period Compute the present value of each cash flow and then determine how long it takes to pay back on a discounted basis Decision Rule: Assume we will accept the project if it pays back on a discounted basis in 2 years.
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