FINC 322 - Chapter 9 Capital Budgeting

FINC 322 - Chapter 9 Capital Budgeting - FINC 322 Financial...

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FINC 322 Financial Management 1 Chapter 9 N ET P RESENT V ALUE AND O THER I NVESTMENT C RITERIA Page 1 of 12 C HAPTER 9. N ET P RESENT V ALUE AND O THER I NVESTMENT C RITERIA Capital budgeting concerns which projects to accept and which to reject . The decision of whether or not a company should buy a new machine, a new building, develop and launch a new product, or perhaps even buy a new subsidiary, is always difficult. The importance of intuition for decision making cannot be overstated. Three widely used methods for evaluating capital expenditures: 1. Net Present Value (NPV) 2. Payback period 3. Internal Rate of Return (IRR) A. Net Present Value (NPV) The NPV is defined as the sum of PVs of each CF , including both inflows and outflows, discounted at the project’s cost of capital . As a result, it equals the amount of wealth that an investment creates . If the NPV is positive , the project should be accepted , while if the NPV is negative , it should be rejected . Suppose that you have two potential projects, A and B, and their NPVs are positive. If these two projects are mutually exclusive, which one should you choose?
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FINC 322 Financial Management 1 Chapter 9 N ET P RESENT V ALUE AND O THER I NVESTMENT C RITERIA Page 5 of 12 SIGNIFICANCE OF NPV Wealth creation is an incredibly important objective. Financial market transactions create wealth when entrepreneurs finance positive NPV investments. NPV represents wealth creation
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FINC 322 - Chapter 9 Capital Budgeting - FINC 322 Financial...

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