Dont worry about discounted payback period average accounting return or

Dont worry about discounted payback period average

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Don’t worry about “discounted” payback period, average accounting return, or profitability index Qualitative/Conceptual o The IRR is really just the particular discount rate that sets the NPV =0…….note, we want the IRR to be higher than our discount rate (or, required rate of return)….when IRR > discount rate, then NPV > 0 and vice versa…..so, when NPV=0 (sort of the “breakeven” point), then the IRR at that point is exactly equal to the discount rate o Understand the definition (and use) of mutually exclusive vs. independent projects Know this!...”mutually exclusive” is when you are forced to choose 1 investment (and you choose the highest NPV, regardless of what the IRR is)…….”independent” is when you are not forced to choose and can accept all investment projects that have a positive NPV (or, alternatively, have their IRR higher than the discount rate, or required rate of return) o Apply IRR, NPV, and payback methods – when to accept and/or reject projects (Relates to above bullet points) o Understand how best to interpret IRR and NPV, when projects are either mutually exclusive or independent (again, relates to the above bullet points in this section) o Understand the size, or scale, problem with interpreting IRR (Skip – you won’t be asked this) o Understand the concern with using IRR, when a project has cash-flows with multiple sign changes (Skip – you won’t be asked specifically about this) o Understand the concerns with using the payba c k method (payback ignores risk, time-value of money, opportunity cost, and cash flows received after an arbitrarily-determined cutoff, or required payback, period)
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