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Unformatted text preview: all of the
project’s cash flows.
(500) 150 150 150 150 150 (300) 0
(500) 0 7 8 0 1 2 3 4 5 6 This project is clearly unprofitable,
but we would accept it based on a 4accept
year payback criterion! Other Methods
1) Net Present Value (NPV)
2) Profitability Index (PI)
3) Internal Rate of Return (IRR)
Each of these decision-making criteria: Examines all net cash flows, Considers the time value of money, and Considers the required rate of return. Net Present Value
• NPV = the total PV of the annual net
cash flows - the initial outlay.
n NPV = Σ
(1 + k) t - IO Net Present Value
Net • Decision Rule:
• If NPV is positive, accept.
• If NPV is negative, reject.
reject NPV Example
NPV Suppose we are considering a capital
investment that costs $250,000 and
provides annual net cash flows of
$100,000 for five years. The firm’s
required rate of return is 15%.
15% NPV Exa...
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This note was uploaded on 01/17/2014 for the course GEB 3375 taught by Professor Sweo during the Winter '08 term at University of Central Florida.
- Winter '08