321Class04-Decision%20Making - Nominal vs. Real Interest...

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Nominal vs. Real Interest Rates The Fisher Equation Real CF = Nominal CF / (1 + inflation rate)
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Burgernomics
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Decision Making DCF NPV IRR Payback Period Breakeven Analysis Equivalent Annual Cost
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Capital Rationing Mutually Exclusive Investments Limited resources Rationing Financial Rationing (“Hard Rationing”) Managerial Rationing (“Soft Rationing”)
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Real World
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Discounted Cash Flows Net Present Value = -CF0 + CF1 + CF2 +…+ CF∞ NPV= + + + …. NPV= C0 + PV(DCF)t = C0 + ) 1 ( 1 1 r CF + ) 1 ( 2 2 2 r CF + ) 1 ( 3 3 3 r CF + + t t t r C ) 1 (
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Does NPV Lead to Better Decisions? Real Dollar Values (not Nominal) Actual Cash Flows You set the r (“opportunity cost of capital”) Look at each project separately: NPV a + NPV b = NPV (a + b) Book Value required by GAAP
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What is Cost of Capital? Balance Sheet Liabilities = Debt Equity Cost of Debt = K d = Interest Payments / Debt Cost of Equity = K e = g P DIV r + = 0 1
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This note was uploaded on 10/28/2011 for the course FIN 321 taught by Professor Smith during the Fall '08 term at University of Illinois at Urbana–Champaign.

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321Class04-Decision%20Making - Nominal vs. Real Interest...

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