Textbook Notes (368,311)
Canada (161,806)
York University (12,845)
Finance (91)
FINE 2000 (79)

fine NPV notes.docx

3 Pages
Unlock Document

FINE 2000
Mehdi Beyaghi

CH 7 - NPV and Other Investment Criteria 7.2 Other investment criteria payback period - time until cash flows recover the initial investment of the project The payback rule states that a project should be accepted if its payback period is less than a specified cutoff period. - payback does not consider any cash flows that arrive after the payback period - this could result in two different projects being accepted, although only one might have a positive NPV - second problem is that payback gives equal weight to all cash flows arriving before the cutoff period despite the fact that the more distant flows are less valuable -the payback rule will bias the firm against accepting long-term projects because cash flows arriving after payback period are ignored - in spite of these problems, payback is widely used for its simplicity and ability to communicate throughout a firm -payback is widely used when capital investment is small or when merits of the project are so obvious that more formal analysis is unnecessary discounted payback - the time until discounted cash flows recover the initial investment in the project Discounted payback rule asks: how long must the project last in order to offer a positive NPV? - discounted payback offers an advantage over normal payback: if a project meets discounted payback cutoff, it must have a positive NPV because the cash flows accrued upto the discounted payback period are just sufficient to provide a PV equal to the initial investment - it still ignores all cash flows occurring after the arbitrary cutoff date, and will reject some positive NPV opportunities internal rate of return - compute end of year profit per dollar invested in the project (rate of return = profit/investment) Two rules: NPV rule ( invest in any project with positive NPV when cash flows discounted at opportunity cost of capital) and rate of return rule (invest in any project offering rate of retur
More Less

Related notes for FINE 2000

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.