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

Lecture 19 - Capital Budgeting - NPV and Other Criteria...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
oday Today ± Capital Budgeting: NPV and Other riteria (Chapter 9) Criteria (Chapter 9) BAFI 355 – Spring 2010 19-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Capital Budgeting: ecision Rules Decision Rules ± The methods ± Net present value (NPV) ± Payback ± Discounted payback py ± Internal rate of return (IRR) ± Profitability Index (PI) BAFI 355 – Spring 2010 19-2
Background image of page 2
The Internal Rate of Return (IRR) ule Rule ± IRR he discount rate that equates the present value of a project’s ± The discount rate that equates the present value of a project s expected inflows to the present value of project’s costs ± Solving for IRR 12 3 0 CF 0 CF 1 CF 2 CF 3 ± Find IRR such that: 0 1 0 = + = t t t ) IRR ( CF BAFI 355 – Spring 2010 19-3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
pplications: Example 3 Applications: Example 3 Compute the IRR for Project S. ± Project S: -1,000 500 400 300 100 ne needs to solve: 12 3 0 4 ± One needs to solve: 0 ) IRR 1 ( 100 ) IRR 1 ( 300 ) IRR 1 ( 400 ) IRR 1 ( 500 000 , 1 4 3 2 = + + + + + + + + ± No closed-form solution. By using either trial-and-error or a financial calculator or Excel you get: BAFI 355 – Spring 2010 19-4 IRR=14.49%
Background image of page 4
he NPV Profile The NPV Profile ± NPV profile is the graph relating the NPV of the project to the discount rate. For project S we derive: $300.00 $400.00 Discount Rate NPV 0.0 $300.00 2.5 $237.71 NPV 100 00) $0.00 $100.00 $200.00 0 5 10 15 20 25 5.0 $180.42 7.5 $127.62 10.0 $78.82 12.5 $33.62 15.0 ($8.33) IRR Discount rate ($300.00) ($200.00) ($100.00) 17.5 ($47.35) 20.0 ($83.72) 22.5 ($117.68) 25.0 ($149.44) ± If we graph the NPV profile, we can see the IRR as the x-axis intercept BAFI 355 – Spring 2010 19-5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The IRR Rule: etails Details ± Rationale for the IRR rule ± IRR is the project’s expected rate of return. If IRR exceeds cost of funds used to finance the project, some surplus will remain ± On the decision: ± Minimum acceptance criteria: Accept project if IRR is greater than the required return, that is, greater than the hurdle rate ± Ranking criteria: Select project with highest IRR ± Strengths ±
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 17

Lecture 19 - Capital Budgeting - NPV and Other Criteria...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online