COMMERCE 2FA3 Lecture Notes - Lecture 5: Net Present Value, Payback Period, Capital Budgeting
10 Apr 2017
School
Department
Course
Professor
Document Summary
L5 chapter 6 corporate finance and capital budgeting. Decision-making criteria when cfos do capital budgeting (these rules require benchmarks). Project must meet or exceed a minimum acceptable criteria. Mutually exclusive: rank order your projects and select the best one. Cons: not consider the profit generate, just consider covering it. Payback period: number of year/time period it takes to recover your investment. Ranking criterion: the lower it is, the better it is. Ranking criterion: choose cash flow with the highest npv. Profitability index (pi): pv (cash inflows)/pv (cash outflows) Ranking criteria: choose the pi with the highest pi. Irr: discount rate at which npv = 0. Criteria: accept if irr > cost of capital/ required return. So you may have to calculate multiple irrs. (2) because irr consider. Notes 1 calculate multiple irrs. (2) because irr consider percentage not dollar value, so it may kame the wrong decision. Npv as a function of the discount rate.
