chapter 7 - Chapter 7 Net present value and other...

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COPYRIGHT©ZHULI 1 Chapter 7 Net present value and other investment criteria
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COPYRIGHT©ZHULI 2 Objectives 1. Calculate the net present value of an investment 2. Calculate the internal rate of return of a project and know what to look out for when using the internal rate of return rule 3. Explain why the payback rule doesn’t always make shareholders better off 4. Use the net present value rule to analyze three common problems that involve competing projects: (a) when to postpone an investment expenditure, (b) how to choose between projects with unequal lives, and (c) when to replace equipment 5. Calculate the profitability index and use it choose between projects when funds are limited
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COPYRIGHT©ZHULI 3 Content Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
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COPYRIGHT©ZHULI 4 Net present value (NPV) : present value of cash flows minus investment The net present value rule states that managers increase shareholders’ wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with a positive net present value The first two steps in calculating NPVs: forecasting the cash flows and estimating the opportunity cost of capital
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COPYRIGHT©ZHULI 5 Suppose that you have identified a possible tenant who would be prepared to rent your office block for 3 years at a fixed annual rent of $16000. You forecast that after you have collected the third year’s rent the building could be sold for $450000 Assume that the opportunity cost of capital is r = 7%
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chapter 7 - Chapter 7 Net present value and other...

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