Chapter 5 lecture

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Unformatted text preview: 5% 4% 3% 2% 1% $(10,000) 0% $- $(20,000) $(30,000) 25 Comparing two projects Comparing • • • Reference (Example): Reference File: Pfe_chap05.xls Worksheet: “page 96” 26 Internal Rate of Return NPV = −$1,000 + $300 $350 $450 + + =0 2 3 1 + IRR (1 + IRR) (1 + IRR) $100.00 $80.00 $60.00 $40.00 $20.00 8. 5% 7. 5% 6. 5% 5. 5% 4. 5% 3. 5% ($40.00) ($60.00) 2. 5% 0. 5% ($20.00) 1. 5% $0.00 ($80.00) ($100.00) 27 Internal Rate of Return – And another way to get there using “Goal Seek” And option option Reference: Reference: File: OtherPracticeProblems_Chp5.xls File: Worksheet: “IRR” 28 NPV, IRR & Decisionmaking • In independent investment decisions, In NPV > 0 and IRR > r will always give consistent answers consistent • When ranking mutually exclusive When investment opportunities, in general, we choose the opportunities with highest NPV or IRR, depending on which method is being used 29 Amortization Tables – Amortized loans are paid off in equal Amortized installments installments – In an amortization table, we can track the In principal and interest portions of each payment p...
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