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Chapter 7 lecture

# 13 npvb npva if the proper discount rate is 10 we

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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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