CH-9 - GSB 531 Managerial Finance Chapter 9 Net Present...

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1 GSB 531 Managerial Finance Chapter 9 Net Present Value and Other Investment Criteria Net Present Value • An investment is worth undertaking if it creates value for its owners. Future Payoffs PV of Payoffs Invest- ment Costs The difference between an investment’s market value (PV of future payoffs) and its costs is called the net present value (NPV) of the investment. Estimating Net Present Value
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The Payback Rule • Payback period: length of time to recover the initial investment. • An investment is acceptable if its payback period is less than some pre-specified number of years. Payback period is exactly two years. Calculating Payback Periods Pros and Cons of the Payback Rule • Time value of money is ignored • The cutoff period is arbitrary • Cash flow after the cutoff period is ignored • Tend to accept short-term investments that pay back quickly and reject long-term projects that pay back slowly. • Biased towards liquidity.
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This note was uploaded on 11/30/2011 for the course GSB 531 taught by Professor Bing during the Spring '11 term at Cal Poly.

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CH-9 - GSB 531 Managerial Finance Chapter 9 Net Present...

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