lecture6-350

lecture6-350 - NPV and other Investment Criteria Capital...

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Financial management: lecture 6 NPV and other Investment Criteria Capital Budgeting Decisions
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Financial management: lecture 6 Today’s agenda Net Present Value (revisit) Other two investment rules
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Financial management: lecture 6 Net Present Value rule (NPV) NPV is the present value of a project minus its cost If NPV is greater than zero, the firm should go ahead to invest; otherwise forget about this project A hidden assumption: there is no budget constraint or money constraint.
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Financial management: lecture 6 NPV (continue) In other words: Managers can increase shareholders’ wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with a positive net present value if there is no budget constraint.
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Financial management: lecture 6 Net Present Value NPV = PV - required investment NPV C C r C r C r t t = + + + + + + + 0 1 1 2 2 1 1 1 ( ) ( ) ... ( )
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An Example An oil well, if explored, can now produce 100,000 barrels per year. The well will produce forever, but production will decline by 4% per year. Oil prices, however, will increase by 2% per year. The discount rate is 8%. Suppose that the price of oil now is $14 for barrel. If the cost of oil exploration is $12.8 million, do
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This note was uploaded on 10/05/2011 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.

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lecture6-350 - NPV and other Investment Criteria Capital...

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