2-13 Notes BF

2-13 Notes BF - Average Accounting Return o There are many...

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2/13/08 Business Finance Notes Project Evaluation Criteria o Net Present Value (NPV) o Internal Rate of Return (IRR) o Profitability Index o Payback Period o Discounted Payback Period o Average Accounting Return Net Present Value o Total of all present values – Initial Investment Payback Period o How long does it take to get the initial cost back in a nominal sense? o Computation Estimate the Cash flows Subtract the future cash flows from the initial cost until the initial investment has been recovered o Decision Rule Accept if the payback period is less than some preset limit Discounted Payback Period o Compute the present value of each cash flow and then determine how long it takes to pay back on a discounted basis o Compare to a specified required period o Decision Rule Accept the project if it pays back within a set allotment of time
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Unformatted text preview: Average Accounting Return o There are many different definitions for average accounting return o The one used in the book is: Average net income / average book value Note that the average book value depends on how the asset is depreciated o Need to have a target cutoff rate o Decision Rule: Accept the project if the AAR is greater than a preset rate Internal Rate of Return o This is the most important alternative to NPV o It is often used in practice and is intuitively appealing o It is based entirely on the estimated cash flows and is independent of interest rates found elsewhere o Definition IRR is the return that makes the NPV = 0 o Decision Rule: Accept the project if the IRR is greater than the required return...
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2-13 Notes BF - Average Accounting Return o There are many...

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