Tutorial 6 - Mon, March 7 - Tutorial 6 Mon, March 7 1. A)...

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Tutorial 6 – Mon, March 7 1. A) What is the payback period? - Amount of time required for an investment to generate cash flows to recover its initial cost b) What is the payback period? Project 0 1 2 3 4 A -500 0 500 0 0 B -500 300 200 0 0 C -500 0 500 100 200 D -500 300 400 0 0 Payback Period: A = B = C = 2 years D: 1.5 years What are some general statements that we can make about these projects? - If the cutoff period was 2 years, all of these projects will be acceptable - Project C is better than A because it has positive cash flows after payback If the discount rate is non-zero, which project(s) will unambiguously lose money? - Project A and B but B will not be as bad as A What are the two major disadvantages of the payback rule? - Ignores time value of money - Ignores cash flows that occur after the payback period 2. What is the Net Present Value? - the difference between an investment’s market value and its cost - it’s a measure of how much value is added today if you were to taken on a project b) Capital Budgeting/ Project Analysis:
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This note was uploaded on 08/05/2011 for the course COMM 298 taught by Professor Freedman during the Winter '09 term at The University of British Columbia.

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Tutorial 6 - Mon, March 7 - Tutorial 6 Mon, March 7 1. A)...

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