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9BUSI408 - Capital Evaluation1

9BUSI408 - Capital Evaluation1 - BUSI 408 Corporate Finance...

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Chip Snively [email protected] Class 9 BUSI 408 Corporate Finance Spring 2012

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2 HW/Next Class Market Update Capital Evaluation Techniques Today: Concepts Next Class: Excel/Practice Agenda
3 Read RWJ5 – Capital Evaluation Techniques If you want, bring laptop to class Not required; I’ll show on screen Homework RWJ5: Q – 3, 9, 11; P – 1, 7, 11, 14, 16 Next Class

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4 Payback Period Net Present Value (NPV) Internal Rate of Return (IRR) Evaluation Techniques
5 Payback Period Method How long does it take the project to “pay back” its initial investment? Payback Period = number of years to recover initial costs Minimum Acceptance Criteria: Set by management Ranking Criteria: Set by management Problem: Ignores TVM Question: Why do many managers use/like it?

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6 Net Present Value (NPV) Net Present Value (NPV) = Total PV of future CF’s + Initial Investment note: CFs ideally are “+”, investment is “-” Estimating NPV: 1. Estimate future cash flows: how much? and when? 2. Estimate discount rate 3. Estimate initial costs Minimum Acceptance Criteria: Accept if NPV > 0 Ranking Criteria: Choose the highest NPV
7 NPV: Example Consider the following project: 0 1 2 3 \$50 \$100 \$150 -\$200 NPV of this project at a 8% discount rate = \$51.11 3 2 ) 08 . 1 ( 150 \$ ) 08 . 1 ( 100 \$ ) 08 . 1 ( 50 \$ 200 + + + + + + - = NPV

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8 Internal Rate of Return
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