COMMERCE 2FA3 Chapter Notes - Chapter 6: Decision Rule, Net Present Value, Weighted Arithmetic Mean
13 Dec 2017
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Chapter 6: corporate finance and capital budgeting reading notes. Capital budgeting process of analyzing projects and deciding which ones should be undertaken include in capital budget if a project is entirely finance by equity, the required return on equity is the appropriate discount rate. If npv < 0, reject project: therfore accept b cuz positive but reject a cuz negative. Profitability index (pi: very closely related to npv, distinguish between outflows and inflows take pv of both all inflow and all outflows, calculating pi, pi = sum(inflow/(1+ke)^t)/sum(outflow/(1+ke)^t, management uses the following decision rule. More than one sign change: an investment project is one that goes from negative cashflows to positive, a disinvestment project is one that goes from positive cashflows to negative. Projects van be related to other potential projects or their adoption might impact the current operations of the firm.
