# Net Present Value (NPV)

Size: px
Start display at page:

Transcription

1 Investment Criteria 208 Net Present Value (NPV) What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value and its cost). How: Estimate future cash flows. Calculate the present value of those cash flows minus the initial cost. 209 NPV Example \$2,000 today and produce cash flows of \$1,500 in each of the next two years. The salvage value will be zero. The cost of capital is 15 percent. Should you buy the machine? 210

2 Net Present Value (NPV) The Rule: An investment should be accepted if the net present value is positive and rejected if it is negative. *Assumes cash flows are reinvested at. 211 What: The internal rate of return is the discount rate that makes the net present value of a project equal to zero. How: Set NPV equal to zero and solve for r. Calculating IRR is identical to calculating the yield to maturity on bonds. 212 IRR Example \$2,000 today and produce cash flows of \$1,500 in each of the next two years. The salvage value will be zero. The cost of capital is 15 percent. Should you buy the machine? 213

3 The Rule: An investment is acceptable if the IRR exceeds the required rate of return. It should be rejected otherwise. *Assumes cash flows are reinvested at. 214 Net Present Value Profile What is it? What information does it provide? BEWARE Nonconventional Cash flows Example: Assume you are considering a project with the following cash flows: Year Cash Flows 0 \$ \$1,431 2 \$3,035 3 \$2,850 4 \$1,

4 Calculate the NPV: at 25.00%: NPV = at 33.33%: NPV = at 486%: NPV = at 66.67%: NPV = What s the IRR? 217 BEWARE Mutually Exclusive Projects Example: Assume you are considering two mutually exclusive investments with the following cash flows: Year Project A Project B 0 \$350 \$250 1 \$ 50 \$125 2 \$100 \$100 3 \$150 \$ 75 4 \$200 \$ Which project should we choose based on the IRR? Should we always choose that project? What is the crossover rate? 219

5 Modified Internal Rate of Return (MIRR) What: MIRR is a calculation of IRR on modified cash flows. For the combination approach, it is the discount rate that equates the present value of all cash outflows to the future value of all cash inflows. How: For the combination approach, discount all cash outflows to time 0 and compound all cash inflows to the end of the project. Then, calculate the discount rate the makes them equal. 220 MIRR Example \$2,000 today and produce cash flows of \$1,500, \$500, and \$1,200 in each of the next three years. The salvage value will be zero. The cost of capital is 15 percent. Should you buy the machine? 221 Modified Internal Rate of Return (MIRR) The Rule: An investment is acceptable if the MIRR exceeds the required rate of return. It should be rejected otherwise. *Assumes cash flows are reinvested at. 222

6 The Profitability Index (PI) What: The profitability index is the present value of an investment s future cash flows divided by its initial cost (absolute value). Also called a benefit cost ratio. How: Calculate the present value of the future cash flows (the PV not the NPV) and divide by the initial cost. If a project has a positive (negative) NPV, the PI will be greater (less) than 223 PI Example #1 \$2,000 today and produce cash flows of \$1,500 in each of the next two years. The salvage value will be zero. The cost of capital is 15 percent. What is its profitability index? Should you buy the machine? 224 PI Example #2 You must choose between the two following mutually exclusive projects: A: Cost is \$ 25 and PV is \$ 50. B: Cost is \$100 and PV is \$150. Which one should you choose? 225

7 The Profitability Index (PI) The Rule: Only accept projects with a PI greater than 1, and invest in projects with the largest PI s first. 226 The Payback Rule What: The payback is the length of time it takes to recover our initial investment. How: Assume cash flows are received uniformly throughout the year. Calculate the number of years it will take for the future cash flows to match the initial cash outflow. 227 Payback Example \$2,000 today and produce the following cash flows: \$500 in year 1, \$750 in year 2, \$300 in year 3, \$1,000 in year 4, and \$5,000 in year 5. Our firm only accepts projects with a payback of 4 years or less. Should you purchase the machine? 228

8 The Payback Rule The Rule: An investment is acceptable if its calculated payback period is less than some prespecified number of years The Discounted Payback Rule What: The discounted payback period is the length of time it takes for the sum of the discounted cash flows to equal the initial investment. How: Assume cash flows are received uniformly throughout the year. Calculate the number of years it will take for the present value of the future cash flows to match the initial cash outflow. 230 Discounted Payback Example \$2,000 today and produce the following cash flows: \$500 in year 1, \$750 in year 2, \$300 in year 3, \$1,000 in year 4, and \$5,000 in year 5. Our firm only accepts projects with a discounted payback of 4 years or less. The cost of capital is 20%. Should you purchase the machine? 231

9 The Discounted Payback Rule The Rule: An investment is acceptable if its discounted payback is less than some prespecified number of years The Average Accounting Return (AAR) What: The average accounting return is the ratio of the average net income of the project to the average book value of the investment. How: Calculate the average net income and divide it by the average book value. 233 AAR Example \$18,000 today and produce the following net income: \$500 in year 1, \$750 in year 2, \$300 in year 3, \$1,000 in year 4, and \$5,000 in year 5. The machine is worthless at the end of its 5 year life. Our firm only accepts projects with an average accounting return greater than 15%. Should you purchase the machine? 234

10 The Average Accounting Return (AAR) The Rule: An investment is acceptable if its average accounting return is greater than some pre specified benchmark. 235 Chapter 9 Suggested Problems Concepts Review and Critical Thinking Questions: 1, 2, 3, 4, 5, 6, 7, and 8 Questions and Problems: 2, 4, 9, 10, 11, 15, 17, 19 (just Method #3: The Combination Approach), and Additional Practice You are considering a project that costs \$1,500 and has the following after tax cash flows: Year 1 \$400 Year 2 \$500 Year 3 \$650 Year 4 \$700 The cost of capital for this project is 15 percent, and your firm only accepts projects with a payback period or discounted payback period of less than 3.5 years. 237

11 Additional Practice (continued) What is the payback period for this project? Would you accept the project according to this criterion? What is the discounted payback period for this project? Would you accept the project according to this criterion? What is the internal rate of return (IRR) for this project? Would you accept the project according to this criterion? 238 Additional Practice (continued) What is the modified internal rate of return (MIRR) for this project (using the combination approach)? Would you accept the project according to this criterion? What is the profitability index (PI) for this project? Would you accept the project according to this criterion? What is the net present value (NPV) for this project? Would you accept the project according to this criterion? 239

### \$1,300 + 1,500 + 1,900 = \$4,700. in cash flows. The project still needs to create another: \$5,500 4,700 = \$800

1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: \$1,300 + 1,500 + 1,900 = \$4,700 in cash flows.

### Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of

1 Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability

### Capital Budgeting: Decision. Example. Net Present Value (NPV) FINC 3630 Yost

Capital Budgeting: Decision Criteria Example Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows

### Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization

T9.1 Chapter Outline Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization! 9.1 Net Present Value! 9.2 The Payback Rule! 9.3 The Average Accounting Return! 9.4 The Internal Rate

### Key Concepts and Skills. Net Present Value and Other Investment Rules. http://www2.gsu.edu/~fnccwh/pdf/ rwjch5v3overview.pdf.

McGraw-Hill/Irwin Net Present Value and Other Investment Rules 9-1 http://www2.gsu.edu/~fnccwh/pdf/ rwjch5v3overview.pdf Copyright 2010 by Charles Hodges and the McGraw-Hill Companies, Inc. All rights

### CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project s life means that the NPV is positive for

### (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics)

Capital Budgeting: Net Present Value vs Internal Rate of Return (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Y O Lam Capital budgeting assists decision makers in a

### Which projects should the corporation undertake

Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.

### CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Basic 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the

### Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 8 Capital Budgeting Concept Check 8.1 1. What is the difference between independent and mutually

### Chapter 10. What is capital budgeting? Topics. The Basics of Capital Budgeting: Evaluating Cash Flows

Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows 1 Topics Overview and vocabulary Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life 2 What

### Prepared by: Dalia A. Marafi Version 2.0

Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC-200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version

### Spring 2012. True/False Indicate whether the statement is true or false.

Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid

### CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows, a payback period less than the project s life means

### CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project

### NPV Versus IRR. W.L. Silber -1000 0 0 +300 +600 +900. We know that if the cost of capital is 18 percent we reject the project because the NPV

NPV Versus IRR W.L. Silber I. Our favorite project A has the following cash flows: -1 + +6 +9 1 2 We know that if the cost of capital is 18 percent we reject the project because the net present value is

### Capital Budgeting OVERVIEW

WSG12 7/7/03 4:25 PM Page 191 12 Capital Budgeting OVERVIEW This chapter concentrates on the long-term, strategic considerations and focuses primarily on the firm s investment opportunities. The discussions

### Capital Budgeting Tools. Chapter 11. Capital Budgeting. Types of Capital Budgeting Projects. The Basics of Capital Budgeting: Evaluating Cash Flows

Capital Budgeting Tools () Payback Period (a) Discounted Payback Period Chapter The Basics of Capital Budgeting: Evaluating s () Net Present Value (NPV) (a) Profitability Index (PI) () Internal Rate of

### Chapter 13 The Basics of Capital Budgeting Evaluating Cash Flows

Chapter 13 The Basics of Capital Budgeting Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 13-1 a. The capital budget outlines the planned expenditures on fixed assets. Capital budgeting

### Chapter 8 Capital Budgeting Process and Techniques

Chapter 8 Capital Budgeting Process and Techniques MULTIPLE CHOICE 1. The capital budgeting process involves a. identifying potential investments b. analyzing the set of investment opportunities, and identifying

### Chapter 9 Capital Budgeting Decision Models

Chapter 9 Capital Budgeting Decision Models LEARNING OBJECTIVES (Slide 9-2) 1. Explain capital budgeting and differentiate between short-term and long-term budgeting decisions. 2. Explain the payback model

### Week- 1: Solutions to HW Problems

Week- 1: Solutions to HW Problems 10-1 a. Payback A (cash flows in thousands): Annual Period Cash Flows Cumulative 0 (\$5,000) (\$5,000) 1 5,000 (0,000) 10,000 (10,000) 3 15,000 5,000 4 0,000 5,000 Payback

### CHAPTER 8 CAPITAL BUDGETING DECISIONS

CHAPTER 8 CAPITAL BUDGETING DECISIONS Q1. What is capital budgeting? Why is it significant for a firm? A1 A capital budgeting decision may be defined as the firm s decision to invest its current funds

### BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

### WHAT IS CAPITAL BUDGETING?

WHAT IS CAPITAL BUDGETING? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial

### Planning for Capital Investments

12-1 Planning for Capital Investments Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 12-2 study objectives 1. Discuss capital budgeting evaluation, and explain inputs used in capital budgeting.

### BUSINESS FINANCE (FIN 312) Spring 2009

BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to

### Bank: The bank's deposit pays 8 % per year with annual compounding. Bond: The price of the bond is \$75. You will receive \$100 five years later.

ü 4.4 lternative Discounted Cash Flow Decision Rules ü Three Decision Rules (1) Net Present Value (2) Future Value (3) Internal Rate of Return, IRR ü (3) Internal Rate of Return, IRR Internal Rate of Return

### Project Cost Management

Project Cost Management Guide to Mathematical Questions PMI, PMP, CAPM, PMBOK, PM Network and the PMI Registered Education Provider logo are registered marks of the Project Management Institute, Inc. Present

### Investment Decision Analysis

Lecture: IV 1 Investment Decision Analysis The investment decision process: Generate cash flow forecasts for the projects, Determine the appropriate opportunity cost of capital, Use the cash flows and

### Investment Appraisal

Investment Appraisal Article relevant to F1 Business Mathematics and Quantitative Methods Author: Pat McGillion, current Examiner. Questions 1 and 6 often relate to Investment Appraisal, which is underpinned

### Economic Analysis and Economic Decisions for Energy Projects

Economic Analysis and Economic Decisions for Energy Projects Economic Factors As in any investment project, the following factors should be considered while making the investment decisions in energy investment

### MODULE 2. Capital Budgeting

MODULE 2 Capital Budgeting Capital Budgeting is a project selection exercise performed by the business enterprise. Capital budgeting uses the concept of present value to select the projects. Capital budgeting

### The Time Value of Money

The Time Value of Money Future Value - Amount to which an investment will grow after earning interest. Compound Interest - Interest earned on interest. Simple Interest - Interest earned only on the original

### The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% = 5.216. = 3.93 years

21-18 Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% 5.216 1a. Net present value \$28,000 (5.216) \$146,048 \$36,048

### Continue this process until you have cleared the stored memory positions that you wish to clear individually and keep those that you do not.

Texas Instruments (TI) BA II PLUS Professional The TI BA II PLUS Professional functions similarly to the TI BA II PLUS model. Any exceptions are noted here. The TI BA II PLUS Professional can perform two

### The Reinvestment Assumption Dallas Brozik, Marshall University

The Reinvestment Assumption Dallas Brozik, Marshall University Every field of study has its little odd bits, and one of the odd bits in finance is the reinvestment assumption. It is an artifact of the

### Review Solutions FV = 4000*(1+.08/4) 5 = \$4416.32

Review Solutions 1. Planning to use the money to finish your last year in school, you deposit \$4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen

Answers to Warm-Up Exercises E10-1. Answer: E10-2. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable

### Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO END-OF-CHAPTER QUESTIONS 10-1 a. Capital budgeting is the whole process of analyzing projects and deciding whether they should

### Performing Net Present Value (NPV) Calculations

Strategies and Mechanisms For Promoting Cleaner Production Investments In Developing Countries Profiting From Cleaner Production Performing Net Present Value (NPV) Calculations Cleaner Production Profiting

### CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

### CARNEGIE MELLON UNIVERSITY CIO INSTITUTE

CARNEGIE MELLON UNIVERSITY CIO INSTITUTE CAPITAL BUDGETING BASICS Contact Information: Lynne Pastor Email: lp23@andrew.cmu.edu RELATED LEARNGING OBJECTIVES 7.2 LO 3: Compare and contrast the implications

### HO-23: METHODS OF INVESTMENT APPRAISAL

HO-23: METHODS OF INVESTMENT APPRAISAL After completing this exercise you will be able to: Calculate and compare the different returns on an investment using the ROI, NPV, IRR functions. Investments: Discounting,

### CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

### The Net Present Value Rule in Comparison to the Payback and Internal Rate of Return Methods

The Net Present Value Rule in omparison to the Payback and Internal Rate of Return Methods Sascha Rudolf, 8-- Preamble In the context of investment decisions companies have a large variety of investment

### Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has \$500 of cash revenue and \$300

### Chapter 5 Capital Budgeting

Chapter 5 Capital Budgeting Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-Income securities. Common stocks. Real assets (capital budgeting). Part C Determination

### Global Financial Management

1 Global Financial Management Valuation of Cash Flows Investment Decisions and Capital Budgeting Copyright 1999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part

### Chapter 011 Project Analysis and Evaluation

Multiple Choice Questions 1. Forecasting risk is defined as the: a. possibility that some proposed projects will be rejected. b. process of estimating future cash flows relative to a project. C. possibility

### Methods for Project Evaluation

Methods for Project Evaluation March 8, 2004 1 Alternative Methods Present worth (PW) method Future worth (FW) method Annual worth (AW) method Benefit-cost ratio (BC) method Internal rate of return (IRR)

### 6 Investment Decisions

6 Investment Decisions After studying this chapter you will be able to: Learning Objectives Define capital budgeting and explain the purpose and process of Capital Budgeting for any business. Explain the

### CHAPTER 29. Capital Budgeting

CHAPTER 9 Capital Budgeting Meaning The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital

### Excel Financial Functions

Excel Financial Functions PV() Effect() Nominal() FV() PMT() Payment Amortization Table Payment Array Table NPer() Rate() NPV() IRR() MIRR() Yield() Price() Accrint() Future Value How much will your money

### Financial and Cash Flow Analysis Methods. www.project-finance.com

Financial and Cash Flow Analysis Methods Financial analysis Historic analysis (BS, ratios, CF analysis, management strategy) Current position (environment, industry, products, management) Future (competitiveness,

### 1. What are the three types of business organizations? Define them

Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas

### Solutions to Chapter 8. Net Present Value and Other Investment Criteria

Solutions to Chapter 8 Net Present Value and Other Investment Criteria. NPV A = \$00 + [\$80 annuity factor (%, periods)] = \$00 \$80 \$8. 0 0. 0. (.) NPV B = \$00 + [\$00 annuity factor (%, periods)] = \$00 \$00

### Tools for Project Evaluation. Nathaniel Osgood 1.040/1.401J 2/11/2004

Tools for Project Evaluation Nathaniel Osgood 1.040/1.401J 2/11/2004 Basic Compounding Suppose we invest \$x in a bank offering interest rate i If interest is compounded annually, asset will be worth \$x(1+i)

### ( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100

Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded

### 2. CAPITAL BUDGETING TECHNIQUES

2. CAPITAL BUDGETING TECHNIQUES 2.1 Introduction 2.2 Capital budgeting techniques under certainty 2.2.1 Non-discounted Cash flow Criteria 2.2.2 Discounted Cash flow Criteria 2.3 Comparison of NPV and IRR

### Resolving Conflicts in Capital Budgeting for Mutually Exclusive Projects with Time Disparity Differences

Resolving Conflicts in Capital Budgeting for Mutually Exclusive Projects with Time Disparity Differences Carl B. McGowan, Jr. 1 ABSTRACT When two capital budgeting alternatives are mutually exclusive and

### How To Get A Profit From A Machine

Vol. 2, Chapter 4 Capital Budgeting Problem 1: Solution Answers found using Excel formulas: 1. Amount invested = \$10,000 \$21,589.25 Compounding period = annually Number of years = 10 Annual interest rate

### MBA Teaching Note 08-02 Net Present Value Analysis of the Purchase of a Hybrid Automobile 1

MBA Teaching Note 08-02 Net Present Value Analysis of the Purchase of a Hybrid Automobile 1 In this day and age of high energy prices and a desire to be more environmentally friendly, the automobile industry

### WORKBOOK ON PROJECT FINANCE. Prepared by Professor William J. Kretlow University of Houston

WORKBOOK ON PROJECT FINANCE Prepared by Professor William J. Kretlow University of Houston 2002 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. TABLE

### Capital Budgeting Formula

apital Budgeting Formula Not in the book. Wei s summary If salvage value S is less than U n : If salvage value S is greater than U n : Note: IF t : incremental cash flows (could be negative) )(NW): change

### LECTURES ON REAL OPTIONS: PART I BASIC CONCEPTS

LECTURES ON REAL OPTIONS: PART I BASIC CONCEPTS Robert S. Pindyck Massachusetts Institute of Technology Cambridge, MA 02142 Robert Pindyck (MIT) LECTURES ON REAL OPTIONS PART I August, 2008 1 / 44 Introduction

### Exercise 6 8. Exercise 6 12 PVA = \$5,000 x 4.35526* = \$21,776

CHAPTER 6: EXERCISES Exercise 6 2 1. FV = \$10,000 (2.65330 * ) = \$26,533 * Future value of \$1: n = 20, i = 5% (from Table 1) 2. FV = \$10,000 (1.80611 * ) = \$18,061 * Future value of \$1: n = 20, i = 3%

### MBA (3rd Sem) 2013-14 MBA/29/FM-302/T/ODD/13-14

Full Marks : 70 MBA/29/FM-302/T/ODD/13-14 2013-14 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM-302 Time : 3 Hours The figures in the right-hand margin indicate marks. Candidates are required

### ECONOMIC JUSTIFICATION

ECONOMIC JUSTIFICATION A Manufacturing Engineer s Point of View M. Kevin Nelson, P.E. President Productioneering, Inc. www.roboautotech.com Contents: I. Justification methods a. Net Present Value (NPV)

### Capital Budgeting Further Considerations

Capital Budgeting Further Considerations For 9.220, Term 1, 2002/03 02_Lecture10.ppt Lecture Outline Introduction The input for evaluating projects relevant cash flows Inflation: real vs. nominal analysis

### Introduction to Real Estate Investment Appraisal

Introduction to Real Estate Investment Appraisal NPV and IRR Pat McAllister INVESTMENT APPRAISAL DISCOUNTED CASFLOW ANALYSIS Investment Mathematics Discounted cash flow to calculate Gross present value

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

### CHAPTER 7: NPV AND CAPITAL BUDGETING

CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental

### Capital Budgeting Techniques: Certainty and Risk

Capital Budgeting Techniques: Certainty and Risk 340 LG1 LG2 LG3 LG4 LG5 LG6 Chapter 9 LEARNING GOALS Calculate, interpret, and evaluate the payback period. Apply net present value (NPV) and internal rate

### Chapter 10: Making Capital Investment Decisions

Chapter 10: Making Capital Investment Decisions Faculty of Business Administration Lakehead University Spring 2003 May 21, 2003 Outline 10.1 Project Cash Flows: A First Look 10.2 Incremental Cash Flows

### CAPITAL BUDGETING. Definition. Time Value of Money [TVM] TVM is the reward for postponement of consumption of money.

11 CAPITAL BUDGETING 1LO 1: Time Value of Money Definition Time Value of Money [TVM] TVM is the reward for postponement of consumption of money. Principle Rs.100 received today is greater than Rs. 100

### Investment, Time, and Present Value

Investment, Time, and Present Value Contents: Introduction Future Value (FV) Present Value (PV) Net Present Value (NPV) Optional: The Capital Asset Pricing Model (CAPM) Introduction Decisions made by a

### Cost Benefits analysis

Cost Benefits analysis One of the key items in any business case is an analysis of the costs of a project that includes some consideration of both the cost and the payback (be it in monetary or other terms).

### CE Entrepreneurship. Investment decision making

CE Entrepreneurship Investment decision making Cash Flow For projects where there is a need to spend money to develop a product or establish a service which results in cash coming into the business in

### CHAPTER 4. The Time Value of Money. Chapter Synopsis

CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money

### 3. Time value of money. We will review some tools for discounting cash flows.

1 3. Time value of money We will review some tools for discounting cash flows. Simple interest 2 With simple interest, the amount earned each period is always the same: i = rp o where i = interest earned

### EXAM 2 OVERVIEW. Binay Adhikari

EXAM 2 OVERVIEW Binay Adhikari FEDERAL RESERVE & MARKET ACTIVITY (BS38) Definition 4.1 Discount Rate The discount rate is the periodic percentage return subtracted from the future cash flow for computing

### Net Present Value and Capital Budgeting. What to Discount

Net Present Value and Capital Budgeting (Text reference: Chapter 7) Topics what to discount the CCA system total project cash flow vs. tax shield approach detailed CCA calculations and examples project

### PAYBACK PERIOD. Calculated as: Payback Period = Cost of Project / Annual Cash Inflows

PAYBACK PERIOD CHRISTINE NYANDAT, 19 Nov, 2013 Definition: Payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an

### ICASL - Business School Programme

ICASL - Business School Programme Quantitative Techniques for Business (Module 3) Financial Mathematics TUTORIAL 2A This chapter deals with problems related to investing money or capital in a business

### How To Calculate Net Present Value In Excel 113

11. Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel John Herbohn and Steve Harrison The financial and economic analysis of investment projects is typically carried out using

### Session #5 Capital Budgeting - II Damodaran - Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14

Session #5 Capital Budgeting - II Damodaran - Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14 I. Additional Issues in Capital Budgeting. A. Capital rationing: Use profitability index

### SOLUTIONS TO BRIEF EXERCISES

ค าตอบแบบฝ กห ด SOLUTIONS TO BRIEF EERCISES BRIEF EERCISE 12-1 \$45, \$5, 9 years BRIEF EERCISE 12-2 Net annual cash flows \$4, 5.65 \$226, 215, \$ 11, The investment should be made because the net present

### Calculator and QuickCalc USA

Investit Software Inc. www.investitsoftware.com. Calculator and QuickCalc USA TABLE OF CONTENTS Steps in Using the Calculator Time Value on Money Calculator Is used for compound interest calculations involving

### Solutions to Practice Questions (Bonds)

Fuqua Business School Duke University FIN 350 Global Financial Management Solutions to Practice Questions (Bonds). These practice questions are a suplement to the problem sets, and are intended for those

### Problems on Time value of money January 22, 2015

Investment Planning Problems on Time value of money January 22, 2015 Vandana Srivastava SENSEX closing value on Tuesday: closing value on Wednesday: opening value on Thursday: Top news of any financial

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### CHAPTER 4 DISCOUNTED CASH FLOW VALUATION

CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems NOTE: All-end-of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability

### NPV calculation. Academic Resource Center

NPV calculation Academic Resource Center 1 NPV calculation PV calculation a. Constant Annuity b. Growth Annuity c. Constant Perpetuity d. Growth Perpetuity NPV calculation a. Cash flow happens at year

### NUS Business School. FIN2004 Finance. Semester II 2013/2014

NUS Business School FIN2004 Finance Semester II 2013/2014 COURSE DESCRIPTION This course provides students with the foundations to understand the key concepts and tools used in Finance. It offers a broad

### Topic 3: Time Value of Money And Net Present Value

Topic 3: Time Value of Money And Net Present Value Laurent Calvet calvet@hec.fr John Lewis john.lewis04@imperial.ac.uk From Material by Pierre Mella-Barral MBA - Financial Markets - Topic 3 1 2. Present

### 6: Financial Calculations

: Financial Calculations The Time Value of Money Growth of Money I Growth of Money II The FV Function Amortisation of a Loan Annuity Calculation Comparing Investments Worked examples Other Financial Functions