Chapter 6 - Chapter 6 Case: NETCO Definition of capital...

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Chapter 6 Case: NETCO Definition of capital budgeting The justification for net present value Independent vs. mutual exclusive projects Simple net present value example Payback example Problems with payback Internal rate of return (IRR) Problems of IRR with independent projects Borrowing vs. lending Multiple rates of return No internal rates of return Problems of IRR with mutually exclusive returns Timing Scale Replacement chains Profitability index Value additivity implies that the contribution of any project to a firm’s value is the NPV of the project. When calculating NPV, you compare the interest rate of a project to the interest rate of an equally risky investment (e.g. stock market or real estate) Opportunity Cost in these cases is the discount rate of an equally risky project The key to NPV lies in three attributes (p. 146) Payback Method Counts number of years until initial investment is recovered, ignoring the time value of money. Noted: (-50 k, 30 k, 20 k, 10 k) where each of the positive numbers are inflows and the negatives are outflows. The commas separate inflows and outflows between consecutive years. Payback period rule says that all investments taking more than x years to recover the initial investment are rejected and within x years accepted. Problems with
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Chapter 6 - Chapter 6 Case: NETCO Definition of capital...

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