L_11_ - Lecture 11 Net Present Value and Other Investment Criteria Lecture Organization IRR Incremental Cash Flows The Capital Budgeting

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Unformatted text preview: Lecture 11 Net Present Value and Other Investment Criteria Lecture Organization IRR Incremental Cash Flows The Capital Budgeting Decisions: "What Assets Should We Buy?" “What investment Should We Choose? “ Is given investment project worthwhile to undertake? There are several approaches (rules) to answer these Questions: Net Present Value Payback Rule (Ordinary and Discounted Payback) Profitability Index Internal Rate of Return Internal Rate of Return Internal rate of return (IRR) IRR rule Internal Rate of Return Illustrated Initial Investment = -$200 Year Cash flow 1 $ 50 2 100 3 150 Find the IRR such that NPV = 0 50 100 150 0= - 200 + + + (1+IRR) 1 (1+IRR) 2 (1+IRR) 3 Internal Rate of Return Illustrated (concluded) NPV = - 200 + 50/ (1+IRR) 1 + 100/(1+IRR) 2 + 150/(1+IRR) 3 Trial and Error Discount rates NPV 0% 5% 10% 15% 20% Problems with the IRR and its Disadvantages Multiple rates of return Mutually exclusive investment decisions IRR Assume you are considering a project for which the cash flows are as follows: Year Cash flows-$252 1 1,431 2...
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This note was uploaded on 06/22/2011 for the course FINA 365 taught by Professor Koch during the Spring '08 term at South Carolina.

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L_11_ - Lecture 11 Net Present Value and Other Investment Criteria Lecture Organization IRR Incremental Cash Flows The Capital Budgeting

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