2-18 Notes BF - • NPV choose the project w higher NPV • IRR – choose the project w the higher IRR • Profitability Index o = PV Future Cash

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2/18/07 Business Finance Notes Things to know (NPV) o Net Present Value o Payback Period o Discounted Payback Period o Average Accounting Return o Internal Rate of Return (IRR) Investment = PV (CF, IRR) Internal Rate of Return o NPV and IRR will generally give us the same decision If not, go w/ NPV o Sometimes they won’t Non-conventional cash flows Cash flows change signs more than once Mutually exclusive projects Initial investments are substantially different Timing of cash flows is substantially different o IRR and Mutually Exclusive Projects Mutually exclusive projects If you choose one, you can’t choose the other Intuitively you would use the following decision rules:
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Unformatted text preview: • NPV - choose the project w/ higher NPV • IRR – choose the project w/ the higher IRR • Profitability Index o = PV ( Future Cash Flows) Investment o If PI is bigger than 1, then it’s a good investment Less than 1, not good • Relevant Cash Flows o The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted These cash flows are called incremental cash flows o The stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows o...
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This note was uploaded on 04/07/2008 for the course BA 3341 taught by Professor Polkovnichenko during the Spring '08 term at University of Texas at Dallas, Richardson.

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