Beruflich Dokumente
Kultur Dokumente
Lakehead University
Fall 2004
1. Net Present Value 2. The Payback Rule 3. The Average Accounting Return 4. The Internal Rate of Return 5. The Protability Index 6. The Practice of Capital Budgeting
2 = $20.48. (1.12)8
The NPV Rule: An investment should be accepted if its net present value is positive and should be rejected otherwise.
Project 1 -50 12 12 12 12 12 12 12 12
CCF1 -50 -38 -26 -14 -2 10 22 34 46
Project 2 -50 20 15 10
CCF2 -50 -30 -15 -5
6
1
4
5
3
8
2
10
2
12
10
Project 2s cost is paid back between year 3 and year 4. The exact time can be approximated as follows: Payback period = 3 + 5 5 = 3+ = 3.83 years. 1 (5) 6
11
12
NPV of project 2 = $3.75. That is, if the payback rule were Only accept projects with a payback period under 4 years, then project 2 would be accepted and project 1 would be rejected, even though NPV of project 2 < 0 < NPV of project 1.
13
14
15
16
0 -50
1 12
2 12
3 12
4 12
-2
5 12
10
6 12
22
7 12
34
4.8
8 12
46
9.6
Project 2
CCF2 CDCF2
-50
20
15
10
-50 -30 -15 -5 5 8 10 12 1 -50 -32.1 -20.2 -13.1 -9.3 -7.0 -5.5 -4.6 -3.8
17
18
19
20
21
22
23
24
1 100
2 80
3 70
4 90
5 110
25
The Average Accounting Return Rule: A project is acceptable if its AAR is above some target AAR.
26
27
28
29
Year Cash ow
0 -50
1 11
2 13
3 15
4 15
5 14
50 +
30
31
32
0 -60
1 155
2 -100
This project would have two IRRs: 25% and 33.33%. The maximum number of IRRs a project can have is equal to the number of times cash ows change sign.
33
0 -50
8 10 11 12 14 15 15 17 8
-50 16 13 12 12 12 11 10
34
Is project B better than project A? The NPV of B is not always greater than that of A.
35
36
37
t=0
(1 + r)t
CFB,t
= NPVAB .
38
0 -50
8 10 11 12 14 15 15 17 8 9
-50 16 13 12 12 12 11 10 0 -8 -3 -1 0 2 4 5
39
40
41
42
43
44