FNCE10002 Lecture 6: Week 6 Lecture 6

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Melbourne and london offices: decision rule for independent projects. Ignores the time value of money: hurdle is arbitrary. Allocated costs: some costs may be common to several activities, e. g. Npv calculation: but sometimes they can be incremental and in these cases should be included in an. A manager may reject a project with a positive npv because it will increase the costs allocated to the division. It"s a(cid:271)out ho(cid:449) to a(cid:374)al(cid:455)se the(cid:373) (cid:272)orre(cid:272)tl(cid:455: the discount rate used represents the rate of return required by equity holders, debtholders and other securityholders. In principle, it makes no difference which approach we use: we get the same result, a project has only one npv, although different analysts will usually have different estimates of this one number. In practice, first method is nearly always easier. Inflation, nominal rates and real rates: the formula is: (cid:1863)=(cid:4666)(cid:883)+(cid:1863) (cid:4667)(cid:4666)(cid:883)+(cid:1868)(cid:4667) (cid:883)

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