FINE 2000 Chapter Notes - Chapter 8: Payback Period, Cash Flow, Net Present Value
Many big capital projects require heavy investment in intangible assets. Cost of drug development are almost all research and testing. Capital investment project: any expenditure made in hope of generating more cash later. Net present value: difference between a project"s value and its cost. Instead of calculating npv companies can compare expected rate of return from investing in a project with the return that shareholders may earn on equivalent risk investments in capital market. Profitability index: selecting projects that have the highest npv per dollar invested. With interest rate of 7%, the pv of ,000 payoff from the office building is ,832. The pv is the only feasible price and the pv of the property is also its market price. Opportunity cost of capital: expected rate of return given up by investing in a project: if you committed ,000, that means your npv = ,832, npv = pv required investment.