**Unformatted text preview: **roblems: Cutoffs are still subjective. Still does not examine all cash flows. Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 CF (14%)
-500.00
219.30
219.30 5 Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 CF (14%)
-500.00
219.30
219.30
280.70
280.70 1 year
year Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 2 250 CF (14%)
-500.00
219.30
219.30
280.70
280.70
192.37
192.37 1 year
year Discounted Payback
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 2 250 CF (14%)
-500.00
219.30
219.30
280.70
280.70
192.37
192.37
88.33
88.33 1 year
year
2 years
years Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 2 250 3 250 CF (14%)
-500.00
219.30
219.30
280.70
280.70
192.37
192.37
88.33
88.33
168.74 1 year
year
2 years
years Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow
Cash
0
1 -500
250 2 250 3 250 CF (14%)
-500.00
219.30
219.30
280.70
280.70
192.37
192.37
88.33
88.33
168.74 1 year
year
2 years
years
.52 years
.52 Discounted Payback
Discounted
(500) 250 0 1 250 250 250 250
2 3 4 5 Discounted
Discounted Year Cash Flow CF (14%)
Cash Discounted
The
0
1
2
3 -500 ayback
-500.00
P
250
219.30
219.30
is 2.52 years
280.70
280.70
250
192.37
192.37
88.33
88.33
250
168.74 1 year
year
2 years
years
.52 years
.52 More Ex: Discounted payback
period
period Uses discounted cash flows rather than raw
Uses
CFs.
CFs.
0
CFt
PV of CFt
Cumulative -100
-100
-100 Disc PaybackL = 2 + 1 2 10
9.09
-90.91 10% 60
49.59
-41.32 41.32 / 60.11 2.7 3
80
60.11
18.79
= 2.7 years Other Methods
Other
1) Net Present Value (NPV)
1) Net
2) Profitability Index (PI)
2) Profitability
3) Internal Rate of Return (IRR)
3) Internal
Consider each of these decision-making
Consider
criteria: (to solve PB problem)
(to All net cash flows. The time value of money. The required rate of return. Net Present Value
• NPV = the total PV of the annual net
cash flows - the initial outlay.
n NPV = Σ
t=1 FCFt
FCF
(1 + k) t - IO Net Present Value
Net
Decision Rule: • If NPV is positive, accept.
If
accept
• If NPV is negative, reject.
If
reject NPV Example
NPV Suppose we are considering a capital
Suppose
investment that costs $250,000 and
$250,000
provides annual net cash flows of
$100,000 for five years. The firm’s
$100,000
required rate of return is 15%.
15% NPV Example
NPV Suppose we are considering a capital
Suppose
investment that costs $250,000 and
$250,000
provides annual net cash flows of
$100,000 for fi...

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