090919_Project apraisal - Alternative Project Evaluation...

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Alternative Project Evaluation Techniques Lecture 3 19 September 2009
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Disadvantages of NPV z The model of discounted cash flows is very much dependent on the quality of inputs: Cash flows; Discount rates. z It ignores all strategic opportunities one could face if engaged in the project z It gives an absolute value, not a percentage return (could be solved by calculating the PI)
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Alternative techniques of real assets (projects) evaluation z Internal rate of return (IRR); z Payback period (SPB, DPB); z Accounting rate of return; z Etc.
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Internal rate of return z The IRR is defined as the interest rate that would make you indifferent between accepting the project and rejecting it. z When used to discount the cash flows, the IRR results in NPV equal to zero 0 ) 1 ( ) 1 ( 1 0 0 = + = + = = = T t t t T t t t I r CF r CF NPV
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Decision rule z We should compare the IRR of the project with hurdle rate, which is the opportunity cost of capital z If IRR > Hurdle rate => Project is more
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090919_Project apraisal - Alternative Project Evaluation...

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