Chapter_05WhyNetPresentValueLeadstoBetterInvestment(公司金融,英文版)..ppt

Slides by Matthew Will Topics Covered NPV and its Competitors The Payback Period The Book Rate of Return Internal Rate of Return Capital Rationing NPV and Cash Transfers Every possible method for evaluating projects impacts the flow of cash about the company as follows. Payback The payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay. The payback rule says only accept projects that “payback” in the desired time frame. This method is very flawed, primarily because it ignores later year cash flows and the the present value of future cash flows. Payback Example Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less. Payback Example Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less. Book Rate of Return Book Rate of Return - Average income divided by average book value over project life. Also called accounting rate of return. Managers rarely use this measurement to make decisions. The components reflect tax and accounting figures, not market values or cash flows. Internal Rate of Return Example You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment? Internal Rate of Return Example You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment? Internal Rate of Return Example You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment? Internal Rate of Return Internal Rate of Return Pitfall 1 - Lending or Borrowing? Wi