Total PV of future projects CF’s – Initial Investment
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What is NPV’s min acceptance criteria
Accept if NPV>0
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What is NPV’s ranking criteria
Choose highest NPV
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What is the payback period
How long it takes to pay back initial investment
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What are the advantages of PbP
Easy to understand Biased towards Liquidity
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What are the disadvantages of PbP
Ignores Time value of money, Ignores Cash flows after pay back, biased against LT projects, may have negative NPV
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What is DPbP
PbP but takes time value of money into consideration
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How is AAR calculated
Average Net income / Average book value of investment
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What are the advantages of AAR
Easy calc, accounting info readily available
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What are the disadvantages of AAR
Ignores Time value of money, uses arbitrary bench mark, based on book values
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What is the IRR
Discount rate that sets NPV=0
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What is IRR min acceptance criteria
Accept if IRR>Required return
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What is IRR Ranking criteria
Highest IRR
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What are the advantages of IRR
Easy to understand and communicate
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What are the disadvantages of IRR
Doesn’t distinguish between borrowing and lending, Multiple IRRs, Problems with mutually exclusive projects (picking one project affects decisions on others)
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