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

2 pages57 viewsSpring 2019

Department

FinanceCourse Code

FIN 302Professor

Qin LeiLecture

10This

**preview**shows half of the first page. to view the full**2 pages of the document.**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)

PB

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

DPB

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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