Chapter9 Note 02232011 - o No major theoretical flaws o...

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02.23.2011 1. Investment evaluation methodologies Payback period Discounted payback period Net present value (NPV) Internal rate of return (IRR) Profitability index 2. Payback period Definition: the amount of time required for project cash flows to recover initial investment Problems o Ignores time value of money o Requires arbitrary cutoff point o Ignores cash flow beyond payback period o Short-term bias 02.28.2011 3. Net present value Definition The present value of a project’s future cash flows less the cost of the initial investment Problems
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Unformatted text preview: o No major theoretical flaws o Requires a hurdle rate decision o Cash flows assumed to come at year-end o Dependent upon accurately forecasting C/F • Conclusion Best way to measure the value of investments 4. Internal rate of return • Definition The discount rate that makes an investment’s NPV = Zero • Problems o May result in multiple answers o May yield wrong decision for mutually exclusive investments • Popular because… o Does not require calculation of hurdle rate o People prefer talking about rates...
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This note was uploaded on 07/21/2011 for the course BUS 1302 taught by Professor Falcon during the Spring '11 term at University of Texas at Dallas, Richardson.

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Chapter9 Note 02232011 - o No major theoretical flaws o...

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