MGAB03H3 Chapter Notes -Nominal Interest Rate, Risk Premium, Tax Shield

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9 Jan 2011
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Relevant cash flows (a) develop or expand products or services (b) decision to replace or reorganize assets, products, or services. Present value of a series of cash flows. N profitability index and npv method always accept and reject the same project, but index allows managers to rank order projects it provides a simple way to identify which projects are expected to earn higher returns. N the payback method has some important disadvantages. N it does not incorporate tvm future cash flows are not discounted to reflect opportunity cost of using funds for other projects. N this method does not value the cash flows that are received after the investment has been recovered. N in addition, it imposes an arbitrary cut-off period, which favours projects with shorter payback periods. N however, the payback method is used extensively as it is easy to calculate and easy to understand.

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