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Lecture 10

FIN 302 Lecture Notes - Lecture 10: Payback Period, Net Present Value, If And Only IfPremium

2 pages57 viewsSpring 2019

Course Code
FIN 302
Qin Lei

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Chapter 9
NPV Rules
Net Present Value and other investment criteria
NPV = c/(1+r)+c1/(1+r1)+c2/(1+r2)^2…….
Accept the project if NPV >0
Reject the project if NPV < 0
Indifference between accepting /rejecting it if NPV = 0
NPV>0 iff PV(inflows) > PV(outflows)
1. definition : Payback is the number of period it takes to get through
initial investment back
2. Accept the project if payback < maximum allowable payback
Reject the project if payback > maximum allowable payback
Indifference if payback = maximum allowable payback
3. Problem with statistic
a. Ignores TVM
b. Ignores CF after payback is reached
c. Benchmark is determined externally, so cutoff can be arbitrary
1. Definition: Discounted payback addresses the first problem of
payback by using discounted CF to the Payback period.
2. Accept if discounted > max allowed
3. Reject if discounted < max allowed
4. Indifference if DPB = max allowed
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