FIN 3901 Lecture 8: Chapter 8- NPV + Other Investment Criteria

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26 Dec 2016
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Npv and irr are most commonly used as primary investment criteria. Steps: estimate the expected future cash flows, estimate the required return for projects of this risk level, find the present value of the cash flows and subtract the initial investment. Sum of the pv"s of all cash slows at time=0 initial cost. Npv > 0 means: project is expected to add value to the firm (vf, will increase the wealth of owners. Npv is a direct measure of how well this project will meet the goal of increasing shareholder wealth. Npv = net gain in shareholder wealth. Npv=0 project"s inflows are (cid:498)exactly sufficient to repay the invested capital and provide the required rate of return(cid:499) Meets all desirable criteria: considers al cfs, tvm, adjusts for risk, can rank mutually exclusive projects. Steps: estimate the cash flows, subtract future cash flows from the initial cost until investment is recovered. Decision- accept if payback period is less than some preset limit.

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