{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

11-18 Engr 185A

11-18 Engr 185A - o It’s all about preferences •...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Discounted Cash Flows o The discount rate reflects the risk associated with the cash flows Many investors would rather have cash immediately than be compensated for delay Risk premium is extra return added which investors demand for the risks they incur Measure of Risk o When discount rate goes up, present values go down (lower risk, lower payoff) o When discount rate goes down, present values go up (higher risk, higher payoff) Discounted Cash Flow Technique o Estimate relevant cash flows o Calculate rate of return for investment o Compare returns to acceptance criterion
Background image of page 1

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

View Full Document Right Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: o It’s all about preferences • Acceptance Criterion: NPV o Number of years (n) o Interest (i) o Present Value (PV) o Payment (PMT) o Future Value (FV) NPV > 0: Accept the investment NPV< 0: Reject the investment NPV = 0: Marginal • Acceptance Criterion: Benefit Cost Ratio o BCR: Present value of cash inflows / Present value of cash outflows o Accept when BCR > 0, Reject when BCR < 0 • AC: IRR o Internal Rate of Return: Discount rate at which the investment’s NPV equals zero...
View Full Document

{[ snackBarMessage ]}