FI 311 Lecture Notes - Lecture 10: Payback Period, Cash Flow, Net Present Value
Document Summary
Ads: easy to understand, adjust for uncertainty of later cash flows, biased toward liquidity. Dis: ignore time value of money, require an arbitrary cutoff point, biased against long-term project (research, development, new projects. : discounted payback: Ads: does not accept negative estimated npv when all cash flow are positive, biased towards liquidity. Required an arbitrary cutoff point, ignore cash flow beyond cutoff point, biased against long-term project (research, development, new projects. : npv & irr. Npv and irr will generally give us the same decision, exceptions: nonconventional cash flows cash flow signs change more than once, always use npv, mutually exclusive projects initial investments & timing of cash flow are substantially different. Required return crossover point 11. 8%, choose b. Whenever there is a conflict between npv and another decision rule, you should ! Always use npv: profitability index: benefit-cost ratio, useful when we have limited capital.
