HTA 602 Lecture Notes - Lecture 9: Net Present Value, Payback Period, Cash Flow

• School: Ryerson University
• Department: Hospitality and Tourism Management
• Course: HTA 602
• Professor: Bernard Mc Evoy

Document Summary

The basic idea: net present value (npv): difference between investment"s market value & its cost. Positive npv= project is expected to add value to firm& will increase wealth of owners: decision criteria test-npv answer to all question=yes. Defining the rule: payback period: how long does it take to get initial cost back in nominal sense, computation: Should we consider the payback rule for our primary decision criteria: advantages. Adjusts for uncertainty of later cash flows. Biased towards liquidity due to biased short-term projects: disadvantages ignore time value of money require arbitrary cutoff point ignore cash flows beyond the cutoff date. Biased against long-term projects (r&d, new projects) ignore any risks associated with projects. Should we consider the discounted payback rule for our primary decision criteria: advantages include time value of money, easy to understand. Does not accept negative estimated npv investments. Biased against long-term projects (r&d, new projects) requires an arbitrary cutoff point ignores cash flows beyond the cutoff date.