Chap006

Net Present Value and Other Investment Rules

Chapter Outline ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6.1 Why Use Net Present Value? ,[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object]

The Net Present Value (NPV) Rule ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Good Attributes of the NPV Rule ,[object Object],[object Object],[object Object],[object Object]

6.2 The Payback Period Method ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The Payback Period Method ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6.3 The Discounted Payback Period ,[object Object],[object Object],[object Object]

6.4 Average Accounting Return ,[object Object],[object Object]

Average Accounting Return ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6.5 The Internal Rate of Return ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Internal Rate of Return (IRR) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IRR: Example ,[object Object],The internal rate of return for this project is 19.44% 0 1 2 3 $50 $100 $150 -$200

NPV Payoff Profile If we graph NPV versus the discount rate, we can see the IRR as the x-axis intercept. IRR = 19.44%

6.6 Problems with IRR ,[object Object],[object Object],[object Object],[object Object]

Mutually Exclusive vs. Independent ,[object Object],[object Object],[object Object],[object Object]

The Timing Problem 0 1 2 3 $10,000 $1,000 $1,000 -$10,000 Project A 0 1 2 3 $1,000 $1,000 $12,000 -$10,000 Project B

The Timing Problem 10.55% = crossover rate 16.04% = IRR A 12.94% = IRR B

NPV versus IRR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6.7 The Profitability Index (PI) ,[object Object],[object Object],[object Object],[object Object]

The Profitability Index ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6.8 The Practice of Capital Budgeting ,[object Object],[object Object]

The Internal Rate of Return: Example ,[object Object],The internal rate of return for this project is 19.44% 0 1 2 3 $50 $100 $150 -$200

Chap006

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