assume a discount rate of 10% for all three projects
|
|
- Annis Jewel Green
- 7 years ago
- Views:
Transcription
1 Alternative Investment Rules (Text reference: Chapter 6) Topics data for examples net present value (NPV) rule internal rate of return (IRR) rule payback rule discounted payback rule average accounting return (AAR) rule profitability index (PI) rule techniques used in practice 1 Data for Examples: we will consider the following projects: Project A: cost at = 200,000 period cash flows 100,000 60, ,000 net income 20,000 30,000 20,000 Project B: cost at = 30,000 period cash flows 20,000 10,000 15,000 net income 6,000 3,000 6,000 Project C: cost at = 200,000 period cash flows 180,000 60,000 10,000 assume a discount rate of 10% for all three projects 2
2 Net Present Value (NPV) Rule definition: NPV PV future cashflows cost at rule: accept if NPV. More specifically, independent projects: accept if NPV mutually exclusive projects: accept project with highest NPV calculate NPV : NPV 23,140, NPV 7,716 if independent: choose both A and B if mutually exclusive: choose A only 3 NPV rule analysis: notes: - based on cash flow - must forecast all cash flows - considers all cash flows - can be hard to estimate discount rate - discounts cash flows (and incorporates time value of money) accepting positive NPV projects benefits shareholders by increasing the PV of their wealth an NPV profile is useful for analyzing the sensitivity of the NPV to the appropriate discount rate. The profile plots NPV as a function of the discount rate. 4
3 NPV profile discount rate 5% 10% 15% 20% NPV 44,682 23,140 4,652 (11,343) 50k 40k 30k 20k 10k -10k 5% 10% 15% 20% 5 Internal Rate of Return (IRR) Rule definition: IRR is the discount rate which results in NPV rule: accept if IRR is greater than the opportunity cost of capital. More specifically, independent projects: accept if IRR OCC mutually exclusive projects: accept project with highest IRR OCC calculate IRR IRR %, IRR % if independent: choose both A and B if mutually exclusive: project sizes differ, so can t tell (IRR says B, NPV says A) 6
4 IRR rule analysis: notes: - better than alternatives such as payback, AAR - mutually exclusive - scale - more intuitive than NPV - mutually exclusive - timing - coincides with NPV for - investing or financing / simple examples lending or borrowing - single number summary of - multiple IRRs project s profitability - comparison to discount rate if not constant over time (term structure of interest rates) most important alternative to the NPV approach IRR discount rate implies NPV in simple cases, always yields same decision as NPV for independent projects trial and error calculation (like yield to maturity for bonds) 7 IRR problem: mutually exclusive - scale affects mutually exclusive project decisions only do we prefer larger $ returns or larger % returns? calculate incremental IRR 8
5 IRR problem: mutually exclusive - timing affects mutually exclusive project decisions only discount rate 5% 10% 15% 20% NPV 44,682 23,140 4,652 (11,343) NPV 34,489 20,736 8,466 (2,546) 50k 40k 30k 20k 10k -10k 5% 10% 15% 20% 9 IRR problem: mutually exclusive - timing calculate incremental IRR 10
6 IRR problem: investing/lending vs. financing/borrowing affects mutually exclusive and independent project decisions consider a project D with cash flows exactly the reverse of project A cash flows (e.g. D = borrowing): period Project A -200, ,000 60, ,000 Project D 200, ,000-60, ,000 we find NPV 23,140, NPV 23,140 IRR %, IRR % IRR rule is reversed for financing/borrowing type projects: if CFs negative first, then investing/lending, rule is accept if IRR OCC if CFs positive first, then financing/borrowing, rule is accept if IRR OCC note: only works if sign of CFs changes only once 11 IRR problem: multiple IRRs affects mutually exclusive and independent project decisions consider project E: we find two IRRs! period Project E -4,000 25,000-25,000 IRR % and IRR % verify that letting equal IRR results in NPV in both cases if sign of cash flows changes times, there can be different IRRs! which IRR is correct? solution: with changing signs, ignore IRR and use the NPV rule 12
7 IRR problem: not constant over time affects mutually exclusive and independent project decisions term structure of interest rates states that rates (and so discount rates) vary depending on the timing of future CFs recall NPV can t compare IRR to the entire term structure of interest rates solution if term structure of interest rates becomes important, ignore IRR and use the NPV rule 13 Payback Period Rule definition: the payback period is the time required for the investment to pay back its cost rule: accept if payback period less than some acceptable threshold period (e.g. 2 years). More specifically, independent projects: accept payback threshold mutually exclusive projects: accept shortest payback threshold calculate payback for Project A payback periods, payback periods if independent: choose B only if mutually exclusive: choose B only 14
8 payback period rule analysis: notes: - simple rule (easy to use) - ignores time value of money - may be important for firms - ignores CFs after cutoff period with liquidity problems - ignores risk differences between projects - arbitrary payback threshold compute fractional years gives the number of years to recover investment cost becomes unreliable as time value of money becomes more important (i.e. larger number of periods, larger interest rate) 15 Discounted Payback Period Rule definition: the discounted payback period is the time required for an investment to pay back its cost, after discounting the project CFs rule: accept if less than threshold period (e.g. 2 years). More specifically, independent projects: accept if discounted payback threshold mutually exclusive projects: accept shortest discounted payback threshold calculate discounted payback for Project A discounted payback periods, discounted payback periods if independent: choose neither if mutually exclusive: choose neither 16
9 discounted payback period rule analysis: notes: - simple rule (easy to use) - arbitrary payback threshold - useful for firms - ignores CFs after cutoff period with liquidity problems - ignores some risk differences - considers timing of CFs between projects - can be hard to estimate discount rate discounted payback period payback period if we have already discounted all CFs, might as well compute NPV and use NPV rule 17 Average Accounting Return (AAR) Rule definition: average project earnings after taxes and depreciation, divided by average book value of investment during its life rule: accept if AAR specifically, acceptable return threshold (e.g. 10%). More independent projects: accept project if AAR threshold mutually exclusive projects: accept project with highest AAR threshold calculate AAR for Project A AAR %, AAR % if independent: choose both A and B; if mutually exclusive: choose B 18
10 average accounting return (AAR) rule analysis: - simple rule (easy to use) - does not use cash flows - sensitive to accounting methods and estimates - ignores timing of cash flows - arbitrary threshold rate - ignores risk differences between projects 19 Profitability Index (PI) Rule definition: PI rule: accept project if PI PV of CFs subsequent to initial investment initial investment 1. More specifically, independent projects: accept project if PI 1 mutually exclusive projects: accept project with highest PI 1 calculate PI for Project A PI, PI if independent: choose both A and B if mutually exclusive: since project sizes are different, can t tell (PI says choose B, NPV says choose A) 20
11 profitability index (PI) rule analysis: notes: - reflects time value of money - mutually exclusive - ignores scale - considers all cash flows - can be hard to estimate discount rate if PI 1, then NPV 0! can overcome the scale problem by looking at PI of incremental cash flows (A - B) useful when there is capital rationing rank projects according to PIs, and invest in projects with highest PIs until all capital is exhausted NPV rule is just as easy to use as PI (and doesn t suffer from scale problems) 21 Techniques used in Practice see text pp based on a 1995 survey of CFOs of large Canadian industrial firms, discounted cash flow methods (IRR, NPV) are the most popular methods payback is also quite popular most firms use NPV or IRR along with payback or AAR payback is most popular among small firms and for firms with CEOs who do not have an MBA firms in industries where cash flows are easier to forecast are more likely to use IRR or NPV 22
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
More informationCapital 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
More informationCHAPTER 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
More informationNet Present Value (NPV)
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
More informationKey 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
More informationCHAPTER 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
More information$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.
More informationWhich 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.
More informationSolutions 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
More informationChapter 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
More informationNPV 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
More informationCapital 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
More informationChapter 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
More informationWHAT 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
More informationNet Present Value and Other Investment Criteria
Net Present Value and Other Investment Criteria Topics Covered Net Present Value Other Investment Criteria Mutually Exclusive Projects Capital Rationing Net Present Value Net Present Value - Present value
More informationChapter 7. Net Present Value and Other Investment Criteria
Chapter 7 Net Present Value and Other Investment Criteria 7-2 Topics Covered Net Present Value Other Investment Criteria Mutually Exclusive Projects Capital Rationing 7-3 Net Present Value Net Present
More informationUnderstanding 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
More informationInvestment 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
More informationChapter 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
More informationIntroduction to Discounted Cash Flow and Project Appraisal. Charles Ward
Introduction to Discounted Cash Flow and Project Appraisal Charles Ward Company investment decisions How firms makes investment decisions about real projects (not necessarily property) How to decide which
More informationReview 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
More informationCHAPTER 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
More informationChapter 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
More informationhp calculators HP 17bII+ Net Present Value and Internal Rate of Return Cash Flow Zero A Series of Cash Flows What Net Present Value Is
HP 17bII+ Net Present Value and Internal Rate of Return Cash Flow Zero A Series of Cash Flows What Net Present Value Is Present Value and Net Present Value Getting the Present Value And Now For the Internal
More informationChapter 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
More informationCapital Investment Appraisal Techniques
Capital Investment Appraisal Techniques To download this article in printable format click here A practising Bookkeeper asked me recently how and by what methods one would appraise a proposed investment
More information6 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
More informationGlobal 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
More informationFinancial 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,
More informationMODULE 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
More informationNet 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
More informationAnswers to Warm-Up Exercises
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
More informationCHAPTER 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
More informationChapter 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
More informationHO-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,
More informationNPV I: Time Value of Money
NPV I: Time Value of Money This module introduces the concept of the time value of money, interest rates, discount rates, the future value of an investment, the present value of a future payment, and the
More information1. 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
More informationBUSINESS 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
More informationChapter 6 Investment Decision Rules
Chapter 6 Investment Decision Rules 6-1. Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what
More informationM.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary
M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.
More informationCapital 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
More informationPart 7. Capital Budgeting
Part 7. Capital Budgeting What is Capital Budgeting? Nancy Garcia and Digital Solutions Digital Solutions, a software development house, is considering a number of new projects, including a joint venture
More informationFundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6%
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2015 Answers Section A 1 A 2 D 3 D Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% 4 A 5 D 6 B 7
More informationWeek- 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
More informationCHAPTER 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
More informationInvestment 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
More informationTools 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)
More information(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
More informationBF 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
More informationChapter 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
More informationSession #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
More informationCHAPTER 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
More informationMBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A
MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will
More informationCapital 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
More informationProject Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis
Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis EA Cost-benefit Analysis A standard way to assess the economic benefits Two
More informationFNCE 301, Financial Management H Guy Williams, 2006
Stock Valuation Stock characteristics Stocks are the other major traded security (stocks & bonds). Options are another traded security but not as big as these two. - Ownership Stockholders are the owner
More informationMeasuring Investment Returns
Measuring Investment Returns Aswath Damodaran Stern School of Business Aswath Damodaran 156 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The
More information1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600
More informationCARNEGIE 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
More informationChapter 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
More informationCHAPTER 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
More informationChapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.
Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is
More information3. 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
More informationCHAPTER 8: ESTIMATING CASH FLOWS
CHAPTER 8: ESTIMATING CASH FLOWS 8-1 a. Straight line depreciation = ($15 - $3)/10 = $1.20 Annual Tax Savings from Depreciation = $ 1.2 (0.4) = $0.48 Present Value of Tax Savings from Depreciation = $
More informationPrepared 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
More informationFINANCIAL EVALUATION OF ENERGY SAVING PROJECTS: BUILDING THE BUSINESS CASE
FINANCIAL EVALUATION OF ENERGY SAVING PROJECTS: BUILDING THE BUSINESS CASE CFAA 2010 Canadian Rental Housing Conference June 14, 2010 Presented by Robert Greenwald, PEng., MBA President, Prism Engineering
More informationIntroduction 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
More informationNUS 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
More informationPAYBACK 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
More informationBENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets
BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch. 3: Decision Rules Harry Campbell & Richard Brown School of Economics The University of Queensland Applied Investment Appraisal
More informationResolving 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
More information2. 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
More informationMeasure for Measure Decision-Making in Life (Re)Insurance
Life Conference 2011 Florian Boecker, Head of Life Solutions, PartnerRe Measure for Measure Decision-Making in Life (Re)Insurance 21 November 2011 To Measure What for? Product Development Marketing Material
More informationFIN 614 Cash Flow Forecasting. Professor Robert B.H. Hauswald Kogod School of Business, AU. Vitamin C. Cash flows matter: focus on economics
FIN 64 Cash Flow Forecasting Professor Robert B.H. Hauswald Kogod School of Business, AU Vitamin C Cash flows matter: focus on economics not earnings or other accounting measures Continue our focus on
More informationMBA Data Analysis Pad John Beasley
1 Marketing Analysis Pad - 1985 Critical Issue: Identify / Define the Problem: Objectives: (Profitability Sales Growth Market Share Risk Diversification Innovation) Company Mission: (Source & Focus for
More informationInvestments. 1.1 Future value and present value. What you must be able to explain:
Investments What you must be able to explain: Future value Present value Annual effective interest rate Net present value (NPV ) and opportunity cost of capital Internal rate of return (IRR) Payback rule
More informationMBA Financial Management and Markets Exam 1 Spring 2009
MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial
More informationProject Management Seminars. Financial Management of Projects
Project Management Seminars Financial Management of Projects.inproject managementandsystems engineering, is a deliverable-oriented decomposition of a project into smaller components. (source: Wikipedia)
More informationPlanning 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.
More informationMethods 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)
More informationChapter 9. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 $20.60 $12.36 $1.00 $2.06 $5.18 $3.11
Chapter 9 9-1 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 $20.60
More informationEXAM 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
More information2. Determine the appropriate discount rate based on the risk of the security
Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the
More informatione C P M 1 0 5 : P o r t f o l i o M a n a g e m e n t f o r P r i m a v e r a P 6 W e b A c c e s s
e C P M 1 5 : P o r t f o l i o M a n a g e m e n t f o r P r i m a v e r a P 6 W e b A c c e s s Capital Budgeting C o l l a b o r a t i v e P r o j e c t M a n a g e m e n t e C P M 1 5 C a p i t a l
More informationOverview of Financial Management
Overview of Financial Management Uwadiae Oduware FCA Akintola Williams Deloitte 1-1 Definition Financial Management entails planning for the future for a person or a business enterprise to ensure a positive
More informationClass Note on Valuing Swaps
Corporate Finance Professor Gordon Bodnar Class Note on Valuing Swaps A swap is a financial instrument that exchanges one set of cash flows for another set of cash flows of equal expected value. Swaps
More informationEconomic Measures of Profitability. Lecture notes for PET 472 Spring 2013 Prepared by: Thomas W. Engler, Ph.D., P.E.
Economic Measures of Profitability Lecture notes for PET 472 Spring 2013 Prepared by: Thomas W. Engler, Ph.D., P.E. Measures Measures that ignore time value of money net profit payout time return on investment,
More informationThe 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
More informationCHAE Review Pricing Modules, Cash Management and Ratio Analysis
CHAE Review Pricing Modules, Cash Management and Ratio Analysis This is a complete review of the two volume text book, Certified Hospitality Accountant Executive Study Guide, as published by The Educational
More informationCommunicating the Value of Energy Efficiency Projects to Financial Decision Makers in Not-For-Profit Markets
Communicating the Value of Energy Efficiency Projects to Financial Decision Makers in Not-For-Profit Markets By: W. Brewster Earle President, Comfort Systems USA Energy Services & John P. Hennessey President,
More informationNUS Business School. FIN2004X Finance. Semester I 2013/2014
NUS Business School FIN2004X Finance Semester I 2013/2014 COURSE INSTRUCTOR: Dr. Jumana Zahalka COURSE TUTORS: Name of Tutor Ms Irene Yap Mr Chong Lock Kuah NUS Email Account fnbv24@nus.edu.sg fnbv27@nus.edu.sg
More informationGordon Guides For the CFP Exam. Financial Math
Financial Math For the CFP Exam, candidates are expected to have a high degree of understanding of time value of money principles, security valuation and basic statistics. Formulas are provided on at the
More informationCapital 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
More informationThe Purchase Price in M&A Deals
The Purchase Price in M&A Deals Question that came in the other day In an M&A deal, does the buyer pay the Equity Value or the Enterprise Value to acquire the seller? What does it mean in press releases
More informationChapter 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
More informationShares Mutual funds Structured bonds Bonds Cash money, deposits
FINANCIAL INSTRUMENTS AND RELATED RISKS This description of investment risks is intended for you. The professionals of AB bank Finasta have strived to understandably introduce you the main financial instruments
More informationThe 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
More informationHP 12C Calculations. 2. If you are given the following set of cash flows and discount rates, can you calculate the PV? (pg.
HP 12C Calculations This handout has examples for calculations on the HP12C: 1. Present Value (PV) 2. Present Value with cash flows and discount rate constant over time 3. Present Value with uneven cash
More informationPaper P1 Performance Operations Post Exam Guide March 2011 Exam. General Comments
General Comments Performance overall in March 2011 was comparable to the September 2010 diet. While the pass rate was acceptable, it could have been significantly improved if candidates had worked through
More information