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NPV and other criteria for Capital Budgeting

Metric generally used by investment industry for

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Unformatted text preview: ow soon I get my money back (look at volatility of stock) get my risk off the table and anything beyond that is profit. (finance theory suggests it’s overweighting early cash flows) Big company should use NPV NPV and payback period are used for capital budgeting only. Internal Rate of Return (IRR) used in money management industry, as well as own portfolio Good approach for determining “break even” discount rate for a project to be NPV positive. You need to factor in what your initial investment is and what you get compared to that. Metric generally used by investment industry for rating performance by fund managers Frequently used in the real estate industry – sometimes called the “cash on cash” return instead of figuring out NPV is this, etc. you look at hurdle rate (implied rate of return from projections versus what interest rate must be for investment to be profitable) Venture Capitalists...
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