Unformatted text preview: $30,000
$20,000
$10,000
2 0% 1 9% 1 8% 17 % 16 % 15 % 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% $(10,000) 0% $- $(20,000)
$(30,000) 12 The crossover point – Below 9.13%, NPV(B) > NPV(A)
– If the proper discount rate is 10%, we should
If
choose project A
13 The crossover point
Reference (Example):
File: Pfe_chap07.xls
Worksheet: “page 165-167”
Please Note that I have also added the “Excel Solver” option to calculate
Cross-Over Point 14 Another example
– Calculate the NPV and the IRR for the following
Calculate
three projects, using 10% as your discount rate:
three – Draw a graph that shows the NPVs of each
Draw
project for discount rates 1%-25%
project
15 Sunk Costs
– “Don’t throw good money after bad” vs.
Don’t
“Don’t cry over spilt milk”
“Don’t
– In capital budgeting, we are making
In
decisions over the firm’s current investment
proposals
proposals
– Regardless of our decisions, sunk costs
Regardless
will not be recovered
will
• Therefore, they should not play a part in our
Therefore,
decision-making
decision-making
16 Sally & Dave’s Condo
– Facts:
•
•
•
•
•
•
• Purchase price = $100,000
“project life” = 10 years
Rental income = $24,000/year
Property taxes = $1,500/year
Miscellaneous expenses = $1,000/year
Depreciation = $100,000/10 = $10,000/year...
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- Fall '14
- Finance, Net Present Value, Generally Accepted Accounting Principles
-
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