NPV and other criteria for Capital Budgeting

NPV and other criteria for Capital Budgeting

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Unformatted text preview: wealth by taking risk- free appraoch Investors are paid to bear illiquidity compare long- term Treasuries vs. T- bills Cost to holding inventories If you are forced to hold something for more than a year, you need to be paid for it. Treasuries (more than a year) vs. T- bills (less than a year) You need to be compensated with a higher rate of return (yield curve is upward sloping) Investors are paid to bear volatility (as measured by standard deviation compare stocks vs. bonds) Assets go up and down Most people don’t like volatility, they have to be paid for it. Stocks go up and down more than bonds because of this (higher rate of return for stocks too) Investors are paid (a little) to bear default risk compare corporate bonds vs. Government bonds. Risk that person will not pay you back (default risk) you won’t charge them...
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This document was uploaded on 03/27/2014 for the course FINC 150 at Georgetown.

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