FIN3403 Chapter Notes - Chapter 11: Capital Budgeting, Cash Flow, Net Present Value
Document Summary
Independent projects are projects whose cash flows are not affected by on another: npv decision rules. If npv exceeds zero, accept the project: mutually exclusive projects, accept project with the highest positive npv. Npv, reject them all: a projects irr is the discount rate that forces the pv of its inflows to equal its cost, forcing npv to equal zero. Irr is an estimate of the projects rate of return, and it"s comparable to the ytm on a bond: npv = cf0+ (cf1/(1+irr)1) + (cf2/(1+irr)2)+ . Irr is the estimate of the project"s rate of return: decision rules. If a firm has reasonably good access to the capital markets, it can rais all the capital it needs at the going rate: the firm can obtain capital, if it has investment opportunities with positive. If the firm uses internally generated cash flows from past projects rather than external capital this will save it the cost of capital.
