Corporate Finance page 8

Corporate Finance page 8 - Incremental IRR investment rule...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
- - Incremental IRR investment rule = applies IRR rule to the difference between the cash flows of two mutually exhaustive alternatives. If you subtract cash flows of opportunity B from cash flows of opportunity A, then you should take the opportunity A if the incremental IRR exceeds the cost of capital. Otherwise you should take B.Shortcomings:IRR exceeds cost of capital for both projects does not imply that both projects have positive NPVThe incremental IRR need not existMany incremental IRRs could existMust keep track of which project is the incremental project. Incremental IRR rule assumes that riskiness of the two projects is the same - Profitability index = value created/resource consumed = NPV/resource consumed identifies optimal combination of projects to undertake in situations shortcomings Chapter 8: - Bonds importance: Prices of risk-free government bonds can be used to determine the risk-free interest rates that produce the yield curve. Yield curve provides important information for valuing risk-free cash flows and assessing expectations of inflation and
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/11/2011 for the course ENG 120 taught by Professor Kaminsky during the Fall '10 term at Berkeley.

Page1 / 2

Corporate Finance page 8 - Incremental IRR investment rule...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online