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

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

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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...
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## 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.

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