CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.
-
Upload
gavyn-ansell -
Category
Documents
-
view
216 -
download
3
Transcript of CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.
![Page 1: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/1.jpg)
CF
473.32
9
Winter 2014
![Page 2: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/2.jpg)
Investment Criteria
ch 9
you may remember some of this
![Page 3: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/3.jpg)
What’s a Good Idea?
assessing an investment option is market value > cost?
• value creation for firm in a rational market
• here’s an odd thing: You should act as if the market is rational. As a manager, responsible for the health of the firm, the
rationality of the market is not your first concern. What matters most is your duty to the firm.
» So you should do those things which, to the best of your knowledge, will create value for the firm.
» “to the best of your knowledge” “rationally”
![Page 4: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/4.jpg)
NPV
Is market value > cost? How much value is created from undertaking
an investment?
sdd ts
t
d
t
ds r)(
FV
r)(
FV
r)(
FVPV
111 2
2
1
1
nt
ntt r)(
CF
r)(
CF
r)(
CFNPV
1...
11 2
2
1
1
given a required return (an r), solve for NPV
![Page 5: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/5.jpg)
IRR
most important alternative to NPV
nt
ntt r)(
CF
r)(
CF
r)(
CFNPV
1...
11 2
2
1
1
set NPV = 0, solve for r
![Page 6: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/6.jpg)
IRR disadvantages
1. mutually-exclusive
projects
2. non-conventional
cash flows may have
• multiple answers
• no answer
if cash flows sign changes >1• use NPV instead
-$8,000
-$4,000
$0
$4,000
25% 50%
![Page 7: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/7.jpg)
NPV
nt
ntt r)(
CF
r)(
CF
r)(
CFNPV
1...
11 2
2
1
1
321 12.1
00.080,91
12.1
00.800,70
12.1
00.120,6300.000,165$
)()()(NPV
“A Project”
year CF NI
0 -$165,000
1 63,120 $13,620
2 70,800 3,300
3 91,080 29,100
given: r = 12%
solve for NPV
![Page 8: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/8.jpg)
IRR
nt
ntt r)(
CF
r)(
CF
r)(
CFNPV
1...
11 2
2
1
1
year CF NI
0 -$165,000
1 63,120 $13,620
2 70,800 3,300
3 91,080 29,100
321 1
00.080,91
1
00.800,70
1
00.120,6300.000,165$0
r)(r)(r)(
given: NPV = 0
solve for r
![Page 9: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/9.jpg)
IRR disadvantages
1. mutually-exclusive projects doesn’t compare together if IRR gives different answer than NPV
• trust NPV instead
![Page 10: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/10.jpg)
What To Do?
primary NPV IRR
secondary payback
• useful for explanation
if payback-obsessed: # years arbitrary What about after?
![Page 11: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/11.jpg)
What’s a Good Idea?
assessing an investment option is market value > cost? time value risk
![Page 12: CF 473.32 9 Winter 2014. Investment Criteria ch 9 you may remember some of this.](https://reader036.fdocuments.us/reader036/viewer/2022081603/56649c995503460f9495649a/html5/thumbnails/12.jpg)
comm
on
problems?
considers easy to
time value
risk
value creation
use
explain
NPV payback disc. payback AAR IRR profitability
Assessment Methods