{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

311 ch10 - Capital Budgeting Decision Criteria and Real...

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

View Full Document Right Arrow Icon
Capital Budgeting Decision Criteria and Real Option Considerations Chapter 10
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 Criteria Net present value ( NPV ) Internal rate of return ( IRR ) Profitability index ( PI ) Payback period ( PB )
Background image of page 2
Net Present Value PV of the stream of future CFs from a project minus the project’s net investment ( 29 ) ( ) ( Out PV In PV NPV NINV k NCF NPV NINV PVNCF NPV n t t t - = - + = - = = 1 1
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
NPV Characteristics NPV > 0 acceptable above-normal profits Considers the time value of money Absolute measure of wealth Positive NPVs increase owner’s wealth Negative NPVs decrease owner’s wealth Difficulty: NPV is measured in $. This makes it hard to compare projects with different sizes Key assumption: Cash Flows over the projects life reinvested at k
Background image of page 4
Sources of Positive NPV Projects Buyers preferences for established brand names Control of distribution systems Patent control Exclusive ownership of superior natural resources Inability of new firms to acquire factors of production Access to lower cost financial resources Economies of scale Access to superior labor or management talents
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
IRR Rate of discount that equates the PV of net cash flows of a project with the PV of the NINV ( 29 r IRR NINV r NCF n t t t = + = 1 1
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 ]}