Alternative Investment Rules in Capital Budgeting NPV vs. Payback Period (PP), Accounting ROR, and Internal Rate of Return (IRR) How Important is CB to a firm? Why is Capital Budgeting (CB) so critical to a firms long-term survival? Magnitude of $s involved: Amplifies both, the positive impact of good decisions, and negative impact of poor decisions Repercussions of CB decisions extend over
long periods of time Chhachhi/519/Ch. 6 2 Evaluation of Investment Rules Criterion to be used to judge investment rules: Uses Cash Flows and NOT earnings Uses ALL Cash flows Does NOT ignore Time Value of $ Makes Accept/Reject decisions that are consistent with S/H wealth Max.
Chhachhi/519/Ch. 6 3 NPV-- A benchmark for other Investment Rules! NPV: PV of future CFs - Initial Investment Accept if NPV > 0 (Independent Projects) In case of mutually exclusive (M.E.) projects, choose the highest NPV Accepting +NPV projects will Always increase S/H wealth and vice versa. Why look at other rules??
Chhachhi/519/Ch. 6 4 Payback Period (PP) Rule Length of time it takes for a firm to recover its investment if PP < a cutoff time: Accept Disadvantages Ignores Time Value of money Ignores CFs beyond Payback Period. Biased against Long-term projects
Cutoff time is arbitrarily decided Chhachhi/519/Ch. 6 5 PP Rule (continued) Advantages Easy to understand/use Favors liquidity might be appropriate for quick decisions for repetitive or low budget projects Read: discounted PP (sec. 6.3) & Average Accounting Return (sec. 6.4)
Chhachhi/519/Ch. 6 6 Internal Rate of Return (%) (IRR) The discount rate for which: PV of future CFs = Initial Investment OR NPV of the project = 0 Accept if IRR > Required return M.E.: select alternative with the highest IRR. IRR is independent of discount rate NPV profile: Discount rate, NPV graph
downward sloping Chhachhi/519/Ch. 6 7 Potential Problems with IRR (Independent OR M.E.) CF0 =$100, CF1 =-$130; r = 10% NPV = -$18.20, IRR = 30%; Accept???? NO; This is a Financing project for Financing, accept if IRR < r CF0 = -$60, CF1 =$155 CF2 = -$100; Multiple IRRs Neither has any economic meaning Possible if >1 reversal of sign of CFs
NPV does not have these 2 problems Chhachhi/519/Ch. 6 8 Potential Problems with IRR (M.E. projects only) Scale Problem: Comparing small and large projects: A: CF0 = -$100, CF1 = $150; r = 0% NPV = $50, IRR = 50% B: CF0 = -$1,000, CF1 = $1,250; NPV = $250, IRR = 25%
If r= 10%, S or L??? Chhachhi/519/Ch. 6 if r = 5%? 10 Reinvestment Assumption NPV: NPV rule assumes that all future CFs can be reinvested at the discount rate IRR: IRR calculation assumes that all future CFs can be reinvested at the IRR Which is more Realistic? IRR is easy to understand and communicate
Chhachhi/519/Ch. 6 11 Profitability Index (PI)& Capital Rationing PI: PV of future CFs/Initial Investment Accept if >1 (independent projects) Can lead to incorrect decision for M.E. (choosing highest PI) Similar to NPV Capital Rationing: Limited funds PI useful for making optimal decisions
A la contamination bactérienne vient s'ajouter une dévascularisation étendue des fragments osseux. ... Cal vicieux : Consolidation d'un foyer de fracture qui abouti à une altération structurelle de l'os.
HVAC, Industrial/Residential Electricity , Mechanical Maintenance , Precision Machining Technology , Welding . Career Studies Certificates. 21 Program Majors. John Tyler's Other Programs Of Study. Transfer Programs (AS or AA degrees) Business. General Studies.
What's all this social media stuff about? Social media choices. Social media strategy. Traditional marketing vs. inbound marketing. Getting set-up on LinkedIn
A (Nev.) sues B (Cal.) and C (Oreg.) in California state court for batteryA asks for $80k each from B and CMay B and C remove? 1441(b)(2)A civil action otherwise removable solely on the basis of the jurisdiction under section...
Kantianism: Interactions with other people should respect them as rational beings. Utilitarians: You should consider the consequences of an action before deciding whether it's right or wrong. Social contract theory: We should promote collective rights, such as the rights to...
&LIBS is a list of library names, such as: MYLIB YOURLIB HISLIB HERLIB BIGLIBNAME. 2. &LIB is one library name. 3. The first CHGVAR command copies the first 10 bytes of &LIBS to &LIB. (We don't need %SST (substring) because...
Caleb: A Spy with a "Different Spirit" Caleb the son of Jephunneh Numbers 13 6 from the tribe of Judah, Caleb the son of Jephunneh; Different Servant Chosen by Moses to spy the land Selected for the service A different...