# Topic Overview. Learning Objectives. Capital Budgeting Steps: WHAT IS CAPITAL BUDGETING?

Save this PDF as:

Size: px
Start display at page:

Download "Topic Overview. Learning Objectives. Capital Budgeting Steps: WHAT IS CAPITAL BUDGETING?"

## Transcription

1 Chaper 10: THE BASICS OF CAPITAL BUDGETING Should we build his plan? Topic Overview Projec Types Capial Budgeing Decision Crieria Payback Period Discouned Payback Period Ne Presen Value () Inernal Rae of Reurn (IRR) Modified Inernal Rae of Reurn (MIRR) Learning Objecives Think abou his as we cover Chaper 10 Capial Budgeing Decision Mehods. Undersand how o calculae and use he 5 capial budgeing decision echniques: Payback, Discouned Payback,, IRR, & MIRR. Undersand he advanages and disadvanages of each echnique. Undersand which projec o selec when here is a ranking conflic beween and IRR. Which of he following invesmen opporuniies would you prefer? #1) Give me \$1 now and I ll give you \$2 a he end of class. #2) Give me \$100 now and I ll give you \$150 a he end of class. WHAT IS CAPITAL BUDGETING? Capial Budgeing Seps: Analysis of poenial addiions o fixed asses. Long-erm decisions; involve large expendiures. Very imporan o firm s fuure. 1. Esimae CFs (inflows & ouflows). 2. Assess riskiness of CFs. 3. Deermine k = WACC (adj.). 4. Find and/or IRR. 5. Accep if > 0 and/or IRR > WACC. 1

2 Types of Projecs An Example of Muually Exclusive Projecs: Brand new line of business Expansion of exising line of business Replacemen of exising asse Independen vs. Muually Exclusive Normal vs. Non-normal BRIDGE VS. BOAT TO GET PRODUCTS ACROSS A RIVER. Normal vs. Nonnormal Projecs Normal Projec: Cos (negaive CF) followed by a series of posiive cash inflows. One change of signs. Non-normal Projec: Two or more changes of signs. Mos common: Cos (negaive CF), hen sring of posiive CFs, hen cos o close projec. Nuclear power plan, srip mine. Inflow (+) or Ouflow (-) in Year N NN N NN N N NN Our Case Sudy Payback Period (PB) We wan o help Marge Simpson analyze he following business opporuniies by using he following cash flow informaion. Assume Marge's cos of capial is 12%. Time Falafel-Full How 'Bou A Prezel? 0 (20,000) (20,000) 1 15,000 2, ,000 2, ,000 3, ,000 50,000 Measures how long i akes o recovers a projec s cos (CF0 = iniial oulay). Easy o calculae and a good measure of a projec s risk and liquidiy. Decision Rule: Accep if PB < some maximum period of ime. If cash inflows are equal each year (in he form of an annuiy), PB = CF0/Annual CF Oherwise: see our coninuing example. 2

3 Marge s Payback (Assume Marge s max is 2 years) Time Falafel-Full Cumulaive CF How 'Bou A Prezel? Cumulaive CF 0 (20,000) (20,000) (20,000) (20,000) 1 15,000 (5,000) 2,000 (18,000) 2 15,000 10,000 2,500 (15,500) 3 13,000 23,000 3,000 (12,500) 4 3,000 26,000 50,000 37,500 PB = Years Before Full Recovery of Iniial Cos + (Unrecovered CF0)/(Cash inflow during year) Falafel PB = 1 + 5,000/15,000 = 1.33 Prezel PB = ,500/50,000 = 3.25 Marge should choose Falafel using Payback Period. Problems wih Payback Ignores ime value of money! Ignores cash flows beyond payback period. The Discouned Payback Period addresses he firs problem. Disc. PB ells how long i akes o recover capial and financing coss for a projec. Discoun rae = cos of capial. : Sum of he PVs of inflows and ouflows. Marge s Discouned Payback Time Falafel-Full PV(CF) Cumulaive PV(CF) How 'Bou A Prezel? PV(CF) Cumulaive PV(CF) 0 (20,000) (20,000) (20,000) (20,000) (20,000) (20,000) 1 15,000 13,393 (6,607) 2,000 1,786 (18,214) 2 15,000 11,958 5,351 2,500 1,993 (16,221) 3 13,000 9,253 14,604 3,000 2,135 (14,086) 4 3,000 1,907 16,510 50,000 31,776 17,690 PB = Years Before Full Discouned Recovery of Iniial Cos + (Unrecovered Iniial Cos)/(Disc. CF during year) Falafel DPB = 1 + 6,607/11,958 = 1.55 Prezel DPB = ,086/31,776 = 3.44 Discouned Payback sills ignores cash flows beyond he discouned payback period. n CF =. = 0 ( 1 + k) Cos ofen is CF 0 and is negaive. n = = 1 CF ( 1 + k ) CF. 0 Ne Presen Value () = PV of inflows minus Cos = Ne gain in wealh. Accepance of a projec wih a > 0 will add value o he firm. Decision Rule: Accep if >0, Rejec if < 0 Excel and : Why Microsof deserves is legal roubles. Excel s funcion is goofed up. =(k, range of cash flows) Assumes firs cash flow in range occurs a = 1. See spreadshee. Soluion o his spreadshee problem: exclude CF0 ( = 0 cash flow) from cell range and add CF0 (if CF0 is already negaive) or subrac CF0 (if CF0 is posiive) from funcion. 3

4 Marge s s: k = 12% Time Falafel-Full PV(CF) How 'Bou A Prezel? PV(CF) 0 (20,000) (20,000) (20,000) (20,000) 1 15,000 13,393 2,000 1, ,000 11,958 2,500 1, ,000 9,253 3,000 2, ,000 1,907 50,000 31,776 16,510 17,690 Calculaor Seps. Falafel-Full: CF0 = -20,000, C01 = 15,000, F01 = 2, C02 = 13,000, F02 = 1, C03 = 3,000. : I = 12, CPT = 16,510 Prezel: CF0 = -20,000, C01 = 2,000, C02 = 2,500, C03 = 3,000, C04 = 50,000. : I = 12, CPT = 17,690 Marge s Decision If projecs are independen, Marge should selec boh. Boh have posiive. If he projecs are muually exclusive, selec How Bou A Prezel? Prezel > Falafel. Inernal Rae of Reurn: IRR CF 0 CF 1 CF 2 CF 3 Cos Inflows IRR is he discoun rae ha forces PV inflows = cos. This is he same as forcing = 0. : Ener k, solve for. n CF =. = 0 ( 1 + k) IRR: Ener = 0, solve for IRR. n CF = 0. = 0 ( 1 + IRR) Inernal Rae of Reurn (IRR) Inernal Rae of Reurn is a projec s expeced rae of reurn on is invesmen. IRR is he ineres rae where he PV of he inflows equals he PV of he ouflows. In oher words, he IRR is he rae where a projec s = 0. Decision Rule: Accep if IRR > k (cos of capial). Non-normal projecs have muliple IRRs. Don use IRR o decide on non-normal projecs. Marge s IRRs Bes o use calculaor. Calculaor Seps. Falafel-Full: CF0 = -20,000, C01 = 15,000, F01 = 2, C02 = 13,000, F02 = 1, C03 = 3,000. Press IRR, hen CPT: IRR = 54.7% Prezel: CF0 = -20,000, C01 = 2,000, C02 = 2,500, C03 = 3,000, C04 = 50,000. Press IRR, hen CPT: IRR = 33.3% k = 12%. If independen projecs: selec boh, IRRs > 12%. Muually exclusive: selec Falafel; higher IRR. 4

5 Comparison of & IRR For normal independen projecs, boh mehods give same accep/rejec decision. > 0 yields IRR > k in order o lower o 0. However, he mehods can rank muually exclusive projecs differenly. Wha o do, hen? Profiles A graph which shows a projec s a differen ineres raes (cos of capial). Can illusrae ranking conflics beween and IRR. Below is a able of s for Marge s projecs. k Falafel-Full How 'Bou A Prezel? 0% 26,000 37,500 5% 21,589 27,899 10% 17,849 20,289 12% 16,510 17,690 15% 14,649 14,190 25% 9,485 5,216 35% 5,529 (874) 55% (68) (8,201) Marge s Projecs Deermining /IRR Conflic Range Marge's Profiles 40,000 30,000 20,000 IRR(P) IRR(F) 10, ,000 0% 10% 20% 30% 40% 50% 60% -20,000 Cos of Capial (k) Falafel-Full How 'Bou A Prezel? For each year, subrac one projec s cash flows from he oher. If here is a change of signs of hese cash flow differences, a ranking conflic exiss. Find IRR of hese cash flow differences o find rae where he wo projecs have he same = crossover rae. A a cos of capial less han his crossover rae, a ranking conflic beween and IRR exiss. Marge s crossover rae Two reasons profiles cross: Time Falafel-Fullw 'Bou A Prezel? Fal - Pre 0 (20,000) (20,000) 0 CF0 1 15,000 2,000 13,000 C ,000 2,500 12,500 C ,000 3,000 10,000 C03 4 3,000 50,000 (47,000) C04 IRR = Crossover Rae = 14.1% Marge's Profiles A a cos of capial less han 14.1%, Prezel has higher bu lower IRR = Ranking Conflic. A cos of capial greaer han 14.1%, Falafel has he higher and IRR. 40,000 30,000 20,000 10, ,000-20,000 IRR(P) 0% 10% 20% 30% 40% 50% 60% Cos of Capial (k) IRR(F) Falafel-Full How 'Bou A Prezel? 1) Size (scale) differences. Smaller projec frees up funds a = 0 for invesmen. The higher he opp. cos, he more valuable hese funds, so high k favors small projecs. 2) Timing differences. Projec wih faser payback provides more CF in early years for reinvesmen. If k is high, early CF especially good, S > L. 5

6 Which projec is bes for Marge? Think back o my indecen proposal. Which of he following invesmen opporuniies would you prefer? #1) Give me \$1 now and I ll give you \$2 a he end of class. #2) Give me \$100 now and I ll give you \$150 a he end of class. Reconciling Ranking Conflics absen capial raioning. Reinvesmen Rae Assumpion: assumes cash flows are reinvesed a company s cos of capial (i.e.: he invesors required rae of reurn). IRR assumes cash flows are reinvesed a IRR. The reinvesmen rae assumpion is more realisic. Shareholder Wealh Maximizaion: Wan o add more value o he firm han less. Resul: Choose projec wih highes when /IRR ranking conflic exiss for muually exclusive projecs. Acme, Inc. Rocke-Powered Roller Blade Projec Acme is considering he following projec which would marke hese roller blades o coyoes rying o cach road runners. Acme expecs a cash inflow in he year 1, bu an ouflow in he 2 nd (las) year of he projec due o liabiliy claims from injured caroon coyoes. Acme s opporuniy cos of capial is 13%. Year Cash Flow (5) 30 (30) = IRR = 26.8% -6 Rocke-Powered Roller Blade Profile 4-1 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 550% A Acme s 13% opporuniy cos of capial, he projec has a negaive even hough he IRRs (~27% & 374%) are greaer han 13%. Because of his conflic, don use IRR o make decisions for nonnormal projecs! Why even mess wih IRR? Since we like, why mess wih somehing like IRR? A rae of reurn or ineres rae is more inuiive for ousiders and easier o undersand. Bu IRR assumes an unrealisic reinvesmen rae an leads o muliple IRRs for non-normal projecs. Soluion: Modified Inernal Rae of Reurn (MIRR). Modified Inernal Rae of Reurn, MIRR The ineres rae where he FV of a projec s inflows (TV) are discouned o equal he PV of a projec s ouflows. Assumes cash inflows are reinvesed a he projec s cos of capial (k). PV(ouflows) = TV/(1+MIRR) n, where TV = ΣCIF (1+k) n-, and PV(ouflows) = ΣCOF /(1+k) Where CIF = annual cash inflow, and COF = annual cash ouflow. 6

7 Seps o finding MIRR. Find TV of inflows by finding FV of each annual inflow o he end of he projec s life a he cos of capial. Find PV of ouflows a he cos of capial oday. Then find ineres rae over he n years of he projec ha equaes he TV (=FV) o he PV of he ouflows(=pv). Decision rule same as IRR: Compare MIRR o cos of capial. The MIRR for Marge s projecs. Tim e Falafel- Full FV a y r 4 a 1 2 % How 'Bou A Prezel? FV a y r 4 a 1 2 % 0 (20,000) (20,000) 1 15,000 21,074 2,000 2, ,000 18,816 2,500 3, ,000 14,560 3,000 3, ,000 3,000 50,000 50,000 TV = 57,450 TV = 59,306 Falafel-Full: -20,000 = PV, 57,450 = FV, 4 = N, 0 = PMT, CPT I/Y = 30.2% = MIRR How Bou A Prezel: -20,000 = PV, 59,306 = FV, 4 = N, 0 = PMT, CPT I/Y = 31.2% = MIRR Accep boh projecs if independen since MIRRs are greaer han he 12% cos of capial. Prefer prezel if muually exclusive. CF Workshee soluion o MIRR MIRR if more han one ouflow Find of inflows only firs, hen find FV of his single PV. YR FALAFEL ACIF CF WORK 0 0 CF0 = ,000 C01 = 15, ,000 F01 = ,000 C02 = 13,000 F02 =1 4 3,000 C03 = 3,000 F03 = 1 : I = 12, CPT = 36,510-36,510 =PV, 12 = I/Y, 4 = N, 0 = PMT, CPT FV = 57,450. Now 20,000 = PV, MIRR: CPT I/Y = 30.2% ACME Rocke Roller Blades YR CF Cos of capial = 13% FV of inflows a yr 2 = 30(1.13) = 33.9 PV of ouflows oday (yr 0) = -5 30/(1.13) 2 = = PV, 33.9 = FV, 0 = PMT, 2 = N, CPT I/Y = 9.1% MIRR less han 13% consisen wih negaive Summary of Capial Budgeing Mehods Wan a mehod he uses he ime value of money wih all projec cash flows:, IRR & MIRR. IRR can give erroneous decision for nonnormal projecs. Overall, is he bes and preferred mehod. 7

### Capital budgeting techniques

Capial budgeing echniques A reading prepared by Pamela Peerson Drake O U T L I N E 1. Inroducion 2. Evaluaion echniques 3. Comparing echniques 4. Capial budgeing in pracice 5. Summary 1. Inroducion The

### Chapter 7. What s next? Topic Overview. Net Present Value & Other Investment Criteria

What s next? Capital Budgeting: involves making decisions about real asset investments. Chapter 7: Net Present Value and Other Investment Criteria Chapter 8: Estimating cash flows for a potential investment.

### Lecture III: Finish Discounted Value Formulation

Lecure III: Finish Discouned Value Formulaion I. Inernal Rae of Reurn A. Formally defined: Inernal Rae of Reurn is ha ineres rae which reduces he ne presen value of an invesmen o zero.. Finding he inernal

### THE FIRM'S INVESTMENT DECISION UNDER CERTAINTY: CAPITAL BUDGETING AND RANKING OF NEW INVESTMENT PROJECTS

VII. THE FIRM'S INVESTMENT DECISION UNDER CERTAINTY: CAPITAL BUDGETING AND RANKING OF NEW INVESTMENT PROJECTS The mos imporan decisions for a firm's managemen are is invesmen decisions. While i is surely

### Chapter 1.6 Financial Management

Chaper 1.6 Financial Managemen Par I: Objecive ype quesions and answers 1. Simple pay back period is equal o: a) Raio of Firs cos/ne yearly savings b) Raio of Annual gross cash flow/capial cos n c) = (1

### Chapter 6 Interest Rates and Bond Valuation

Chaper 6 Ineres Raes and Bond Valuaion Definiion and Descripion of Bonds Long-erm deb-loosely, bonds wih a mauriy of one year or more Shor-erm deb-less han a year o mauriy, also called unfunded deb Bond-sricly

### PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE

Profi Tes Modelling in Life Assurance Using Spreadshees PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE Erik Alm Peer Millingon 2004 Profi Tes Modelling in Life Assurance Using Spreadshees

### Morningstar Investor Return

Morningsar Invesor Reurn Morningsar Mehodology Paper Augus 31, 2010 2010 Morningsar, Inc. All righs reserved. The informaion in his documen is he propery of Morningsar, Inc. Reproducion or ranscripion

### Chapter 6: Business Valuation (Income Approach)

Chaper 6: Business Valuaion (Income Approach) Cash flow deerminaion is one of he mos criical elemens o a business valuaion. Everyhing may be secondary. If cash flow is high, hen he value is high; if he

### YTM is positively related to default risk. YTM is positively related to liquidity risk. YTM is negatively related to special tax treatment.

. Two quesions for oday. A. Why do bonds wih he same ime o mauriy have differen YTM s? B. Why do bonds wih differen imes o mauriy have differen YTM s? 2. To answer he firs quesion les look a he risk srucure

### 13. a. If the one-year discount factor is.905, what is the one-year interest rate?

CHAPTER 3: Pracice quesions 3. a. If he one-year discoun facor is.905, wha is he one-year ineres rae? = DF = + r 0.905 r = 0.050 = 0.50% b. If he wo-year ineres rae is 0.5 percen, wha is he wo-year discoun

### Chapter 8: Regression with Lagged Explanatory Variables

Chaper 8: Regression wih Lagged Explanaory Variables Time series daa: Y for =1,..,T End goal: Regression model relaing a dependen variable o explanaory variables. Wih ime series new issues arise: 1. One

### One dictionary: Native language - English/English - native language or English - English

Faculy of Social Sciences School of Business Corporae Finance Examinaion December 03 English Dae: Monday 09 December, 03 Time: 4 hours/ 9:00-3:00 Toal number of pages including he cover page: 5 Toal number

### Name: Algebra II Review for Quiz #13 Exponential and Logarithmic Functions including Modeling

Name: Algebra II Review for Quiz #13 Exponenial and Logarihmic Funcions including Modeling TOPICS: -Solving Exponenial Equaions (The Mehod of Common Bases) -Solving Exponenial Equaions (Using Logarihms)

### Present Value Methodology

Presen Value Mehodology Econ 422 Invesmen, Capial & Finance Universiy of Washingon Eric Zivo Las updaed: April 11, 2010 Presen Value Concep Wealh in Fisher Model: W = Y 0 + Y 1 /(1+r) The consumer/producer

### 4. International Parity Conditions

4. Inernaional ariy ondiions 4.1 urchasing ower ariy he urchasing ower ariy ( heory is one of he early heories of exchange rae deerminaion. his heory is based on he concep ha he demand for a counry's currency

### Graphing the Von Bertalanffy Growth Equation

file: d:\b173-2013\von_beralanffy.wpd dae: Sepember 23, 2013 Inroducion Graphing he Von Beralanffy Growh Equaion Previously, we calculaed regressions of TL on SL for fish size daa and ploed he daa and

### Valuation Beyond NPV

FIN 673 Alernaive Valuaion Approaches Professor Rober B.H. Hauswald Kogod School of Business, AU Valuaion Beyond NPV Corporae Finance revolves around hree fundamenal quesions: wha long-erm invesmens should

### Diagnostic Examination

Diagnosic Examinaion TOPIC XV: ENGINEERING ECONOMICS TIME LIMIT: 45 MINUTES 1. Approximaely how many years will i ake o double an invesmen a a 6% effecive annual rae? (A) 10 yr (B) 12 yr (C) 15 yr (D)

### Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is \$613.

Graduae School of Business Adminisraion Universiy of Virginia UVA-F-38 Duraion and Convexiy he price of a bond is a funcion of he promised paymens and he marke required rae of reurn. Since he promised

LEASNG VERSUSBUYNG Conribued by James D. Blum and LeRoy D. Brooks Assisan Professors of Business Adminisraion Deparmen of Business Adminisraion Universiy of Delaware Newark, Delaware The auhors discuss

### Working Paper No. 482. Net Intergenerational Transfers from an Increase in Social Security Benefits

Working Paper No. 482 Ne Inergeneraional Transfers from an Increase in Social Securiy Benefis By Li Gan Texas A&M and NBER Guan Gong Shanghai Universiy of Finance and Economics Michael Hurd RAND Corporaion

### Level I Study Handbook Sample

Level I Sudy Handbook Sample The UpperMark Sudy Handbooks for Level I are comprised of 3 Volumes, each covering abou 10 Topics from he CAIA curriculum. This is a sample of one of he Topic chapers. You

### Market Analysis and Models of Investment. Product Development and Whole Life Cycle Costing

The Universiy of Liverpool School of Archiecure and Building Engineering WINDS PROJECT COURSE SYNTHESIS SECTION 3 UNIT 11 Marke Analysis and Models of Invesmen. Produc Developmen and Whole Life Cycle Cosing

### Benefit-Cost Analysis

Slide 1 Benefi-Cos Analysis Sco Pearson Sanford Universiy Sco Pearson is Professor Emerius of Agriculural Economics a he Food Research Insiue, Sanford Universiy. He has paricipaed in projecs ha combined

### What is a swap? A swap is a contract between two counter-parties who agree to exchange a stream of payments over an agreed period of several years.

Currency swaps Wha is a swap? A swap is a conrac beween wo couner-paries who agree o exchange a sream of paymens over an agreed period of several years. Types of swap equiy swaps (or equiy-index-linked

### 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

### TEACHER NOTES HIGH SCHOOL SCIENCE NSPIRED

Radioacive Daing Science Objecives Sudens will discover ha radioacive isoopes decay exponenially. Sudens will discover ha each radioacive isoope has a specific half-life. Sudens will develop mahemaical

### A Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation

A Noe on Using he Svensson procedure o esimae he risk free rae in corporae valuaion By Sven Arnold, Alexander Lahmann and Bernhard Schwezler Ocober 2011 1. The risk free ineres rae in corporae valuaion

### Chapter 7. Response of First-Order RL and RC Circuits

Chaper 7. esponse of Firs-Order L and C Circuis 7.1. The Naural esponse of an L Circui 7.2. The Naural esponse of an C Circui 7.3. The ep esponse of L and C Circuis 7.4. A General oluion for ep and Naural

### 11/6/2013. Chapter 14: Dynamic AD-AS. Introduction. Introduction. Keeping track of time. The model s elements

Inroducion Chaper 14: Dynamic D-S dynamic model of aggregae and aggregae supply gives us more insigh ino how he economy works in he shor run. I is a simplified version of a DSGE model, used in cuing-edge

### SKF Documented Solutions

SKF Documened Soluions Real world savings and we can prove i! How much can SKF save you? Le s do he numbers. The SKF Documened Soluions Program SKF is probably no he firs of your supplier parners o alk

### BALANCE OF PAYMENTS. First quarter 2008. Balance of payments

BALANCE OF PAYMENTS DATE: 2008-05-30 PUBLISHER: Balance of Paymens and Financial Markes (BFM) Lena Finn + 46 8 506 944 09, lena.finn@scb.se Camilla Bergeling +46 8 506 942 06, camilla.bergeling@scb.se

### A Brief Introduction to the Consumption Based Asset Pricing Model (CCAPM)

A Brief Inroducion o he Consumpion Based Asse Pricing Model (CCAPM We have seen ha CAPM idenifies he risk of any securiy as he covariance beween he securiy's rae of reurn and he rae of reurn on he marke

### USE OF EDUCATION TECHNOLOGY IN ENGLISH CLASSES

USE OF EDUCATION TECHNOLOGY IN ENGLISH CLASSES Mehme Nuri GÖMLEKSİZ Absrac Using educaion echnology in classes helps eachers realize a beer and more effecive learning. In his sudy 150 English eachers were

### Chapter 2 Kinematics in One Dimension

Chaper Kinemaics in One Dimension Chaper DESCRIBING MOTION:KINEMATICS IN ONE DIMENSION PREVIEW Kinemaics is he sudy of how hings moe how far (disance and displacemen), how fas (speed and elociy), and how

### Mathematics in Pharmacokinetics What and Why (A second attempt to make it clearer)

Mahemaics in Pharmacokineics Wha and Why (A second aemp o make i clearer) We have used equaions for concenraion () as a funcion of ime (). We will coninue o use hese equaions since he plasma concenraions

### Glenn P. Jenkins Queen s University, Kingston, Canada and Eastern Mediterranean University, North Cyprus

COST-BENEFIT ANALYSIS FOR INVESTMENT DECISIONS, CHAPTER 3: THE FINANCIAL APPRAISAL OF PROJECTS Glenn P. Jenkins Queen s Universiy, Kingson, Canada and Easern Medierranean Universiy, Norh Cyprus Developmen

### The Grantor Retained Annuity Trust (GRAT)

WEALTH ADVISORY Esae Planning Sraegies for closely-held, family businesses The Granor Reained Annuiy Trus (GRAT) An efficien wealh ransfer sraegy, paricularly in a low ineres rae environmen Family business

### Depreciation and Corporate Taxes

205 Depreciaion and Corporae Taxes Chris Hendrickson Carnegie Mellon Universiy Tung Au Carnegie Mellon Universiy 205.1 Depreciaion as Tax Deducion 205.2 Tax Laws and Tax Planning 205.3 Decision Crieria

### Table of contents Chapter 1 Interest rates and factors Chapter 2 Level annuities Chapter 3 Varying annuities

Table of conens Chaper 1 Ineres raes and facors 1 1.1 Ineres 2 1.2 Simple ineres 4 1.3 Compound ineres 6 1.4 Accumulaed value 10 1.5 Presen value 11 1.6 Rae of discoun 13 1.7 Consan force of ineres 17

### Chapter 9 Bond Prices and Yield

Chaper 9 Bond Prices and Yield Deb Classes: Paymen ype A securiy obligaing issuer o pay ineress and principal o he holder on specified daes, Coupon rae or ineres rae, e.g. 4%, 5 3/4%, ec. Face, par value

### INVESTIGATION OF THE INFLUENCE OF UNEMPLOYMENT ON ECONOMIC INDICATORS

INVESTIGATION OF THE INFLUENCE OF UNEMPLOYMENT ON ECONOMIC INDICATORS Ilona Tregub, Olga Filina, Irina Kondakova Financial Universiy under he Governmen of he Russian Federaion 1. Phillips curve In economics,

### I. Basic Concepts (Ch. 1-4)

(Ch. 1-4) A. Real vs. Financial Asses (Ch 1.2) Real asses (buildings, machinery, ec.) appear on he asse side of he balance shee. Financial asses (bonds, socks) appear on boh sides of he balance shee. Creaing

### The yield curve, and spot and forward interest rates Moorad Choudhry

he yield curve, and spo and forward ineres raes Moorad Choudhry In his primer we consider he zero-coupon or spo ineres rae and he forward rae. We also look a he yield curve. Invesors consider a bond yield

### Optimal Investment and Consumption Decision of Family with Life Insurance

Opimal Invesmen and Consumpion Decision of Family wih Life Insurance Minsuk Kwak 1 2 Yong Hyun Shin 3 U Jin Choi 4 6h World Congress of he Bachelier Finance Sociey Torono, Canada June 25, 2010 1 Speaker

### Relative velocity in one dimension

Connexions module: m13618 1 Relaive velociy in one dimension Sunil Kumar Singh This work is produced by The Connexions Projec and licensed under he Creaive Commons Aribuion License Absrac All quaniies

### DYNAMIC MODELS FOR VALUATION OF WRONGFUL DEATH PAYMENTS

DYNAMIC MODELS FOR VALUATION OF WRONGFUL DEATH PAYMENTS Hong Mao, Shanghai Second Polyechnic Universiy Krzyszof M. Osaszewski, Illinois Sae Universiy Youyu Zhang, Fudan Universiy ABSTRACT Liigaion, exper

### Chapter 9. Capital Budgeting Techniques

Chapter 9 Capital Budgeting Techniques 1 Learning Outcomes Chapter 9 Describe the importance of capital budgeting decisions and the general process that is followed when making investment (capital budgeting)

### Capital Budgeting and Initial Cash Outlay (ICO) Uncertainty

Financial Decisions, Summer 006, Aricle Capial Budgeing and Iniial Cash Oulay (ICO) Uncerainy Michael C. Ehrhard and John M. Wachowicz, Jr. * * The Paul and Beverly Casagna Professor of Finance and Professor

### Equities: Positions and Portfolio Returns

Foundaions of Finance: Equiies: osiions and orfolio Reurns rof. Alex Shapiro Lecure oes 4b Equiies: osiions and orfolio Reurns I. Readings and Suggesed racice roblems II. Sock Transacions Involving Credi

### cooking trajectory boiling water B (t) microwave 0 2 4 6 8 101214161820 time t (mins)

Alligaor egg wih calculus We have a large alligaor egg jus ou of he fridge (1 ) which we need o hea o 9. Now here are wo accepable mehods for heaing alligaor eggs, one is o immerse hem in boiling waer

### Individual Health Insurance April 30, 2008 Pages 167-170

Individual Healh Insurance April 30, 2008 Pages 167-170 We have received feedback ha his secion of he e is confusing because some of he defined noaion is inconsisen wih comparable life insurance reserve

### Cointegration: The Engle and Granger approach

Coinegraion: The Engle and Granger approach Inroducion Generally one would find mos of he economic variables o be non-saionary I(1) variables. Hence, any equilibrium heories ha involve hese variables require

### 4.8 Exponential Growth and Decay; Newton s Law; Logistic Growth and Decay

324 CHAPTER 4 Exponenial and Logarihmic Funcions 4.8 Exponenial Growh and Decay; Newon s Law; Logisic Growh and Decay OBJECTIVES 1 Find Equaions of Populaions Tha Obey he Law of Uninhibied Growh 2 Find

### Chabot College Physics Lab RC Circuits Scott Hildreth

Chabo College Physics Lab Circuis Sco Hildreh Goals: Coninue o advance your undersanding of circuis, measuring resisances, currens, and volages across muliple componens. Exend your skills in making breadboard

### 1 The basic circulation problem

2WO08: Graphs and Algorihms Lecure 4 Dae: 26/2/2012 Insrucor: Nikhil Bansal The Circulaion Problem Scribe: Tom Slenders 1 The basic circulaion problem We will consider he max-flow problem again, bu his

### How Much Life Insurance Do You Need?

How Much Life Insurance o You Need? Chris Robinson 1 and Vicoria Zaremba 2 Augus 14, 2012 Absrac We presen formal models of he differen mehods of esimaing a person s required life insurance coverage. The

### 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

### Economics Honors Exam 2008 Solutions Question 5

Economics Honors Exam 2008 Soluions Quesion 5 (a) (2 poins) Oupu can be decomposed as Y = C + I + G. And we can solve for i by subsiuing in equaions given in he quesion, Y = C + I + G = c 0 + c Y D + I

### Lecture 7 - Capital Budgeting: Decision Criteria

Lecture 7 - Capital Budgeting: Decision Criteria What is Capital Budgeting? Analysis of potential projects. Long-term decisions; involve large expenditures. Very important to a firm s future. The Ideal

### 2.6 Limits at Infinity, Horizontal Asymptotes Math 1271, TA: Amy DeCelles. 1. Overview. 2. Examples. Outline: 1. Definition of limits at infinity

.6 Limis a Infiniy, Horizonal Asympoes Mah 7, TA: Amy DeCelles. Overview Ouline:. Definiion of is a infiniy. Definiion of horizonal asympoe 3. Theorem abou raional powers of. Infinie is a infiniy This

### LECTURE: SOCIAL SECURITY HILARY HOYNES UC DAVIS EC230 OUTLINE OF LECTURE:

LECTURE: SOCIAL SECURITY HILARY HOYNES UC DAVIS EC230 OUTLINE OF LECTURE: 1. Inroducion and definiions 2. Insiuional Deails in Social Securiy 3. Social Securiy and Redisribuion 4. Jusificaion for Governmen

### 1. The graph shows the variation with time t of the velocity v of an object.

1. he graph shows he variaion wih ime of he velociy v of an objec. v Which one of he following graphs bes represens he variaion wih ime of he acceleraion a of he objec? A. a B. a C. a D. a 2. A ball, iniially

### THE DETERMINATION OF PORT FACILITIES MANAGEMENT FEE WITH GUARANTEED VOLUME USING OPTIONS PRICING MODEL

54 Journal of Marine Science and echnology, Vol. 13, No. 1, pp. 54-60 (2005) HE DEERMINAION OF POR FACILIIES MANAGEMEN FEE WIH GUARANEED VOLUME USING OPIONS PRICING MODEL Kee-Kuo Chen Key words: build-and-lease

### Hedging with Forwards and Futures

Hedging wih orwards and uures Hedging in mos cases is sraighforward. You plan o buy 10,000 barrels of oil in six monhs and you wish o eliminae he price risk. If you ake he buy-side of a forward/fuures

### Density Dependence. births are a decreasing function of density b(n) and deaths are an increasing function of density d(n).

FW 662 Densiy-dependen populaion models In he previous lecure we considered densiy independen populaion models ha assumed ha birh and deah raes were consan and no a funcion of populaion size. Long-erm

### Economics 140A Hypothesis Testing in Regression Models

Economics 140A Hypohesis Tesing in Regression Models While i is algebraically simple o work wih a populaion model wih a single varying regressor, mos populaion models have muliple varying regressors 1

### SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES

Inernaional Journal of Accouning Research Vol., No. 7, 4 SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Mohammad Ebrahimi Erdi, Dr. Azim Aslani,

### NORTHWESTERN UNIVERSITY J.L. KELLOGG GRADUATE SCHOOL OF MANAGEMENT

NORTHWESTERN UNIVERSITY J.L. KELLOGG GRADUATE SCHOOL OF MANAGEMENT Tim Thompson Finance D30 Teaching Noe: Projec Cash Flow Analysis Inroducion We have discussed applying he discouned cash flow framework

### If You Are No Longer Able to Work

If You Are No Longer Able o Work NY STRS A Guide for Making Disabiliy Reiremen Decisions INTRODUCTION If you re forced o sop working because of a serious illness or injury, you and your family will be

### WHAT ARE OPTION CONTRACTS?

WHAT ARE OTION CONTRACTS? By rof. Ashok anekar An oion conrac is a derivaive which gives he righ o he holder of he conrac o do 'Somehing' bu wihou he obligaion o do ha 'Somehing'. The 'Somehing' can be

### The Effect of Working Capital Management on Reducing the Stock Price Crash Risk(Case Study: Companies Listed in Tehran Stock Exchange)

Inernaional Research Journal of Applied and Basic Sciences 2013 Available online a www.irjabs.com ISSN 2251-838X / Vol, 6 (9): 1222-1228 Science Explorer Publicaions The Effec of Working Capial Managemen

### Issues Using OLS with Time Series Data. Time series data NOT randomly sampled in same way as cross sectional each obs not i.i.d

These noes largely concern auocorrelaion Issues Using OLS wih Time Series Daa Recall main poins from Chaper 10: Time series daa NOT randomly sampled in same way as cross secional each obs no i.i.d Why?

### Journal Of Business & Economics Research September 2005 Volume 3, Number 9

Opion Pricing And Mone Carlo Simulaions George M. Jabbour, (Email: jabbour@gwu.edu), George Washingon Universiy Yi-Kang Liu, (yikang@gwu.edu), George Washingon Universiy ABSTRACT The advanage of Mone Carlo

### 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

### TREASURY BILL VERSUS PRIVATE MONEY MARKET YIELD CURVES

TREASURY BILL VERSUS PRIVATE MONEY MARKET YIELD CURVES Timohy D. Rowe, Thomas A. Lawler* and Timohy Q. Cook The relaionship beween ime o mauriy and yield on securiies is of widespread ineres o financial

Chaper 8 Copyrigh 1997-2004 Henning Umland All Righs Reserved Rise, Se, Twiligh General Visibiliy For he planning of observaions, i is useful o know he imes during which a cerain body is above he horizon

### The Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas

The Greek financial crisis: growing imbalances and sovereign spreads Heaher D. Gibson, Sephan G. Hall and George S. Tavlas The enry The enry of Greece ino he Eurozone in 2001 produced a dividend in he

### Lecture Note on the Real Exchange Rate

Lecure Noe on he Real Exchange Rae Barry W. Ickes Fall 2004 0.1 Inroducion The real exchange rae is he criical variable (along wih he rae of ineres) in deermining he capial accoun. As we shall see, his

### The Time Value of Money

THE TIME VALUE OF MONEY CALCULATING PRESENT AND FUTURE VALUES Fuure Value: FV = PV 0 ( + r) Presen Value: PV 0 = FV ------------------------------- ( + r) THE EFFECTS OF COMPOUNDING The effecs/benefis

### Answer, Key Homework 2 David McIntyre 45123 Mar 25, 2004 1

Answer, Key Homework 2 Daid McInyre 4123 Mar 2, 2004 1 This prin-ou should hae 1 quesions. Muliple-choice quesions may coninue on he ne column or page find all choices before making your selecion. The

### ( ) in the following way. ( ) < 2

Sraigh Line Moion - Classwork Consider an obbec moving along a sraigh line eiher horizonally or verically. There are many such obbecs naural and man-made. Wrie down several of hem. Horizonal cars waer

### Week #9 - The Integral Section 5.1

Week #9 - The Inegral Secion 5.1 From Calculus, Single Variable by Hughes-Halle, Gleason, McCallum e. al. Copyrigh 005 by John Wiley & Sons, Inc. This maerial is used by permission of John Wiley & Sons,

### CHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation

CHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation Should we build this plant? 10-1 Capital Budgeting Overview Project Classifications Analysis Methods/Decision Rules Comparison of

### CHAPTER FIVE. Solutions for Section 5.1

CHAPTER FIVE 5. SOLUTIONS 87 Soluions for Secion 5.. (a) The velociy is 3 miles/hour for he firs hours, 4 miles/hour for he ne / hour, and miles/hour for he las 4 hours. The enire rip lass + / + 4 = 6.5

### 1. Time Value of Money 3 2. Discounted Cash Flow 35 3. Statistics and Market Returns 49 4. Probabilities 81 5. Key Formulas 109

1. Time Value of Money 3 2. Discouned Cash Flow 35 3. Saisics and Make Reuns 49 4. Pobabiliies 81 5. Key Fomulas 109 Candidae Noe: This is a lenghy Sudy Session ha, along wih Sudy Session 3, you should

### Chapter 8 Student Lecture Notes 8-1

Chaper Suden Lecure Noes - Chaper Goals QM: Business Saisics Chaper Analyzing and Forecasing -Series Daa Afer compleing his chaper, you should be able o: Idenify he componens presen in a ime series Develop

### Permutations and Combinations

Permuaions and Combinaions Combinaorics Copyrigh Sandards 006, Tes - ANSWERS Barry Mabillard. 0 www.mah0s.com 1. Deermine he middle erm in he expansion of ( a b) To ge he k-value for he middle erm, divide

### CRISES AND THE FLEXIBLE PRICE MONETARY MODEL. Sarantis Kalyvitis

CRISES AND THE FLEXIBLE PRICE MONETARY MODEL Saranis Kalyviis Currency Crises In fixed exchange rae regimes, counries rarely abandon he regime volunarily. In mos cases, raders (or speculaors) exchange

### Chapter 4: Exponential and Logarithmic Functions

Chaper 4: Eponenial and Logarihmic Funcions Secion 4.1 Eponenial Funcions... 15 Secion 4. Graphs of Eponenial Funcions... 3 Secion 4.3 Logarihmic Funcions... 4 Secion 4.4 Logarihmic Properies... 53 Secion

### HANDOUT 14. A.) Introduction: Many actions in life are reversible. * Examples: Simple One: a closed door can be opened and an open door can be closed.

Inverse Funcions Reference Angles Inverse Trig Problems Trig Indeniies HANDOUT 4 INVERSE FUNCTIONS KEY POINTS A.) Inroducion: Many acions in life are reversible. * Examples: Simple One: a closed door can

### Optimal Time to Sell in Real Estate Portfolio Management

Opimal ime o Sell in Real Esae Porfolio Managemen Fabrice Barhélémy and Jean-Luc Prigen hema, Universiy of Cergy-Ponoise, Cergy-Ponoise, France E-mails: fabricebarhelemy@u-cergyfr; jean-lucprigen@u-cergyfr

### Return Calculation of U.S. Treasury Constant Maturity Indices

Reurn Calculaion of US Treasur Consan Mauri Indices Morningsar Mehodolog Paper Sepeber 30 008 008 Morningsar Inc All righs reserved The inforaion in his docuen is he proper of Morningsar Inc Reproducion

### CHARGE AND DISCHARGE OF A CAPACITOR

REFERENCES RC Circuis: Elecrical Insrumens: Mos Inroducory Physics exs (e.g. A. Halliday and Resnick, Physics ; M. Sernheim and J. Kane, General Physics.) This Laboraory Manual: Commonly Used Insrumens:

### Acceleration Lab Teacher s Guide

Acceleraion Lab Teacher s Guide Objecives:. Use graphs of disance vs. ime and velociy vs. ime o find acceleraion of a oy car.. Observe he relaionship beween he angle of an inclined plane and he acceleraion

### Chapter 7: Net Present Value and Other Investment Criteria

FIN 301 Class Notes Chapter 7: Net Present Value and Other Investment Criteria Project evaluation involves: 1- Estimating the cash flows associated with the investment project (ch. 8) 2- Determining the

### Lump Sum Investing and Regular Investing

December, 1. 5. 2014 Lump Sum Invesing and Regular Invesing Radim Gowald Mendel Universiy in Brno Deparmen of Finance Brno, Czech Republic radim.gowald@mendelu.cz Absrac The paper is focused on curren