# FIN 401 Lecture Notes - Lecture 3: Sunk Costs, Preferred Stock, Capital Budgeting

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6 Dec 2016
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## Document Summary

Npv= present value of discounted cash flows. positive = accept. Npv is best way to make a decision. Irr: (cid:449)e"(cid:396)e spe(cid:374)di(cid:374)g (cid:373)o(cid:374)e(cid:455) toda(cid:455) that (cid:449)ill (cid:271)(cid:396)i(cid:374)g futu(cid:396)e (cid:272)ash flo(cid:449)s, (cid:449)e use those (cid:272)ash flo(cid:449)s to figu(cid:396)e out what the rate is. The irr is the discount rate that makes npv = 0. Accept if irr is greater than required return. The bigger the discount rate means npv will be lower. Unconventional cash flows: irr may choose to reject, when npv could chose to accept. There is an additional irr due to the bell curved cash flows. Irr cannot be used with unconventional cash flows (positive and negative cash flows). Crossover rate: the discount rate at which you are indifferent about the project selection. Put the difference of cash flows into the calc. Compute irr : 11. 8% is the crossover rate. At 11. 8% discount rate, the npv would be the same for both projects.