chp 9

# chp 9 - Net Present Value and Other Investment Criteria...

This preview shows pages 1–13. Sign up to view the full content.

Net Present Value and Other Investment Criteria Chapter Nine

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

View Full Document
Chapter Outline Net Present Value The Payback Rule The Discounted Payback The Average Accounting Return (Skip) The Internal Rate of Return The Profitability Index The Practice of Capital Budgeting MIRR ( SKIP
Good Decision Criteria We need to ask ourselves the following questions when evaluating decision criteria 1. Does the decision rule adjust for the time value of money? 2. Does the decision rule adjust for risk? 3. Does the decision rule provide information on whether we are creating value for the firm?

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

View Full Document
Net Present Value The difference between the market value of a project and its cost How much value is created from undertaking an investment? 1. Estimate the expected future cash flows. 2. Estimate the required return for projects of this risk level. (Opportunity cost ) 3. The third step is to find the present value of the cash flows and subtract the
Net Present Value 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| -250 -100 -100 -100 -100 -100 +200 +200 +200 +200 +200 +100 +100 +100 +100 +100 If conventional CFs, 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| (-) (+) (+) (+) (+) (+)

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

View Full Document
Net Present Value ( 29 ( 29 ( 29 1 2 0 2 1 1 1 n n C C C NPV C r r r ± ± ± = ± + + +⋅⋅⋅+ + + +
NPV – Decision Rule If the NPV is positive, accept the project A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners. Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.

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

View Full Document
Project Example Information You are looking at a new project and you have estimated the following cash flows: Year 0: CF = -165,000 Year 1: CF = 63,120 Year 2: CF = 70,800 Year 3: CF = 91,080 NPV= 12,627.41 ( accept) Your required return for assets of this risk is 12%.
Computing NPV for the Project Using the formulas: NPV = ? Do we accept or reject the project?

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

View Full Document
Computing NPV for the Project Using the calculator: CF , 2 nd [ CLR WORK ] CF0 = ENTER C01 = ENTER F01 = C02 = ENTER F02 = C03 = ENTER NPV, I = ENTER CPT =>
Decision Criteria Test - NPV Does the NPV rule account for the time value of money? Yes we are discounting Does the NPV rule account for the risk of the cash flows? Yes In the required return of similar risk Does the NPV rule provide an indication about the increase in value? Yes NPV rule is our primary decision.

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

View Full Document
Payback Period How long does it take to get the initial cost back in a nominal sense?
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern