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st time we discussed…
Last time we discussed…
•
How can managers determine whether a project is a good
investment?
•
Various decision criteria:
a)
Net present value (NPV)
b)
Payback period (PB) / Discounted PB period
c)
Profitability index (PI)
d)
Internal rate of return (IRR)
e)
Average accounting return (AAR)
c!
f)
Etc!
From here on out, (unless you’re told otherwise) assume that capital
udgeting decisions are made based on the NPV rule
budgeting decisions are made based on the NPV rule.
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View Full Document eview Questions
Review Questions
Calculate the following (occ = 15%)
1. PB period
2. Discounted PB period
Year
0
Project A
‐
300,000
0 000
Project B
‐
40,000
9 000
3. NPV
4. IRR
1
2
3
20,000
50,000
50,000
90 000
19,000
12,000
18,000
0 500
5. Profitability index
6. If the two projects are mutually exclusive, which will you
oose?
4
390,000
10,500
choose?
What should we use as the occ (i.e., discount rate)?
(,
)
•
The expected return on the overall stock market is 11% and
the riskless rate is 4%. A firm with average risk is considering
an investment of 100 in a project that is certain to pay off 106
ne year from now
one year from now.
•
Should the project be taken or not? Why?
•
Hint: recall brief discussion on why we call it the “
opportunity
cost of capital
”
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View Full Document vesting in a financial security
Investing in a financial security
•
Suppose the firm is thinking about buying shares of stock X.
What is the NPV of this investment?
•
Hint: recall that the price of a financial security is the present value of its
expected future cash flows (in an efficient market)
ig picture
Big picture
•
Earlier in the class (i.e., many weeks ago), we did pro
‐
forma
statements to determine whether certain levels of growth were
feasible
•
Now, we want to evaluate specific
projects to see how to best
achieve this desired growth
•
In the last lecture, we used simple examples where the incremental
net cash flows were just given to us
–
Now we must figure out how to get these numbers, and take into account
things such as tax shields, changes in NWC, etc…
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This note was uploaded on 01/31/2011 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue University.
 Spring '08
 MATTHEWJAMESBARCASKEY

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