7BUSI408TR Snively - Capital Evaluation

# 7BUSI408TR Snively - Capital Evaluation - BUSI 408...

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Chip Snively Class 7 BUSI 408 Corporate Finance Fall 2011

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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 Mechanics of NPV and IRR NPV In excel, the NPV formula: @NPV(rate, range of cash flows)+ (T0 cash flow) Or You can manually discount by calculating cash flows, dividing each cash flow by (1+r)^n, then summing IRR In excel, the IRR formula: @IRR(range of cash flows, guess)

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6 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?
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

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7BUSI408TR Snively - Capital Evaluation - BUSI 408...

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