Corporate Finance page 7 - Chapter 6 - - N PV = initial +...

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- Chapter 6 - - NPV = initial + C/r - If the cost estimate is more than the IRR, the NPV will be negative. In general, if the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimates that can exist without altering the original decision. - NPV Rule – compares present values - Payback investment rule - opportunity that pays back its initial investment quickly is a good idea. To apply the payback rule, you first calculate the amount of time it takes to pay back the initial investment, called the payback period. This is not reliable because it ignores the time value of money and cost of capital. - Internal rate of return investment rule - if the return on the investment opportunity you are considering is greater than the return on other alternatives in the market with equivalent risk and maturity you should undertake the opportunity. Take any investment opportunity where IRR exceeds the opportunity cost of capital. Turn down
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This note was uploaded on 01/11/2011 for the course ENG 120 taught by Professor Kaminsky during the Fall '10 term at University of California, Berkeley.

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Corporate Finance page 7 - Chapter 6 - - N PV = initial +...

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