MGMT310NotesChpt09

MGMT310NotesChpt09 - Net PresentValue The Payback Rule The...

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Unformatted text preview: Net PresentValue The Payback Rule The Discounted Payback The AverageAccounting Return The Internal Rate of Return The Profitability Index Capital Budgeting Review and Preview Tools we’ve mastered TVM Determining discount rates Valuing simple CFs: coupons and dividends Finally ready to use these tools to: Make financially sound decisions for the firm that accomplish our main goal: MGMT 310: Spring 2011 Dr. Amanda Thompson 1 Capital Budgeting Decisions Which machine? Launch new product? Build new facility? How to evaluate capital budgeting decision rules: Does the decision rule adjust for the time value of money? Does the decision rule adjust for risk? Does the decision rule provide information on whether we are creating value for the firm? Good Decision Criteria Method: Determine the value as the difference between the market value of a project and its costs Steps: Estimate the expected future cash flows. Estimate the required return for projects of this risk level. Calculate the sum of the present value of all positive and negative cash flows of the investment. Net PresentValue MGMT 310: Spring 2011 Dr. Amanda Thompson 2 Rule: Accept project if the ______________ A positive NPV means that the project is expected to: Adding value increases the wealth of the owners NPV is a direct measure of how well this project will meet our main goal. NPV Decision Rule Does the NPV rule: account for the time value of money? account for the risk of the cash flows? provide an indication about the increase in value? Should we consider the NPV rule for our primary decision rule? Consider NPV against criteria MGMT 310: Spring 2011 Dr. Amanda Thompson 3 First step: Draw cash flow time line Second step: Calculate the PV/FV “factors” for each CF and include these on your CF time line Note: So far we are still skipping the difficult and interesting part of actually estimating the actual project CFs REVIEW: Crucial First Steps MGMT 310: Spring 2011 Dr. Amanda Thompson 4 You are looking at a new project and you have estimated the following cash flows: Year 0: CF = ‐ 165,000 Year 1: CF = 63,120 Year 2: CF = 70,800 Year 3: CF = 91,080 Your required return for assets of this risk is 12%. Do we accept or reject this project? NPV Example MGMT 310: Spring 2011 Dr. Amanda Thompson 5 Becomes essential when you have to compute the cash flows as well. Still follow the same steps Cash Flows Factors New function: SUMPRODUCT() Using Excel Method: Determine _________________________________ __________________________ in a nominal sense Steps: Estimate the cash flows Subtract the future cash flows from the initial cost until the initial investment has been recovered Decision Rule – Accept if the payback period is ______________________________ Payback Period MGMT 310: Spring 2011 Dr. Amanda Thompson 6...
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This note was uploaded on 04/04/2012 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue.

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MGMT310NotesChpt09 - Net PresentValue The Payback Rule The...

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