Lecture 19 - Capital Budgeting - NPV and Other Criteria (II)

Lecture 19 Capital Budgeting NPV and Other Criteria(II)

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 50 60 This is a borrowing project. For is borrowing project. For it, the IRR rule is reversed, i.e., accept the project if IRR is less than the discount rate ($20.00) ($30.00) ($40.00) BAFI 355 – Spring 2010 19-7 Issues with IRR: Multiple IRRs IRRs If project has nonnormal cash flows, you might find multiple IRR’s The NPV Profile Curve Example: For the flows below: 0 10% - 1.6 1 10 2 -10 Solve for IRR: − 1.6 10 − 10 + + =0 (1 + IRR ) 0 (1 + IRR )1 (1 + IRR ) 2 $1.50 NPV 2 IRRs $1.00 $0.50 Cost of capital $0.00 0 100 200 300 400 500 ($0.50) And get IRR=25% and IRR=400% ($1.00) ($1.50) BAFI 355 – Spring 2010 19-8 Problems with IRR: Scale Would you rather make 100% or 50% on your investments? What if the 100% return is on a $1 investment while the 50% return is on a $1,000 investment? Compare $1 with $500, and it is cl...
View Full Document

This note was uploaded on 05/28/2013 for the course BAFI 355 taught by Professor Mahnic during the Spring '09 term at Case Western.

Ask a homework question - tutors are online