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Cooperate finance
The document discusses why net present value (NPV) is a better method for evaluating investment decisions than other criteria such as internal rate of return (IRR) and payback period. It explains that NPV recognizes the time value of money by discounting all future cash flows to their present value. It also allows for comparing projects of different sizes by being measured in the same units. In contrast, other methods like IRR and payback period do not properly account for the timing of cash flows and can sometimes select inferior projects.
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Cooperate finance
- 1.
- 2. Principles of CorporateFinance Chapter 5 Why Net Present Value Leads to Better Investment Decisions than Other Criteria
- 3. GROUP MEMBERSM.SAJID 10 M.IRFAN SIDDIQUE 20 AFZAAL SAQIM 19 ADIL NISAR 28 ARSALAN YOUSAF 18 FAHAD MUSHTAQ 24 SANA JAVED 38 ZAWAR HUSSAIN 51
- 4.
- 5. IRR IRR stands for Internal Rate of Return. It is a Capital Budgeting Techniqe. More difficult than NPV. The Decision Criteria If IRR > Cost of capital, Accept the project. If IRR < Cost of capital, Reject the project.
- 6. Formula of IRR.L% + [ Npvh / Npvh – Npvl ] * [ H% - L% ]
- 7. PRESENT VALUE Presentvalue is the currant dollar value of a future amount_the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.
- 8. FORMULA OF PERESENT VALUE PV= FV /(1+i)n For example how much would I have to deposit today into a account paying 7% annual interest to accumulate 3000$ at the end of 5 years.
- 9. NET PRESENT VALUEA sophisticated capital budgeting technique; found by subtracting a projects initial investment from the present value of its cash inflows discounted at a rate equal to the firms cost of capital NPV= Present value of cash inflows - Initial investment
- 10. THE DECISION CRITERIAWhen NPV IS used to make accept_reject decisions, the decision criteria as follows, If the NPV is greater than $0 accept the project. If the NPV is less than $0 reject the project.
- 11. NPV COMPETITORSIRR PAYBACK BOOK RATE OF RETURN
- 12. Three points toRemember about NPV First the NPV Rule recognizes that a rupee today is worth more than a rupee tomorrow. NPV depends solely on the forecasted cash flow from the project and the opportunity cost of capital. Because present value are all measured in todays rupees, you can add them up.
- 13.
- 14. Payback period Theamount of time required for a firm to cover its initial investment in a project, as calculated by cash inflow.
- 15. Decision criteria Whenthe payback period is used to make accept_reject decions,the decision criteria as follows If the payback period is less than the maximum acceptable payback period, accept the project. If the payback period is greater than the maximum acceptable payback period, reject the project
- 16. Payback Example Examinethe 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.
- 17.
- 18. Profitability Index Whenresources are limited, the profitability index (PI) provides a tool for selecting among various project combinations and alternatives A set of limited resources and projects can yield various combinations. The highest weighted average PI can indicate which projects to select.
- 19. NPV = sum of the P.V of cash inflow - initial investment
- 20. Choosing The CapitalInvestment When resources are Limited: The opportunity cost of capital is 10% and our company has the following opportunity . Cash Flow(RS. Millions) 12 +15 +5 -5 C 16 +20 +5 -5 B 21 +5 +30 -10 A NPV at 10 % C3 C2 C1 Project
- 21. Profitability Index: ProfitabilityIndex =Net P.V / investment
- 22. For our threeprojects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability index NPV Rs.millions Investment Rs.millions Project
- 23.
- 24. PRESENT VALUE Presentvalue is the currant dollar value of a future amount_the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.
- 25. FORMULA OF PERESENT VALUE PV= FV /(1+i)n For example how much would I have to deposit today into a account paying 7% annual interest to accumulate 3000$ at the end of 5 years.
- 26. NET PRESENT VALUEA sophisticated capital budgeting technique; found by subtracting a projects initial investment from the present value of its cash inflows discounted at a rate equal to the firms cost of capital NPV= Present value of cash inflows - Initial investment
- 27. THE DECISION CRITERIAWhen NPV IS used to make accept_reject decisions, the decision criteria as follows, If the NPV is greater than $0 accept the project. If the NPV is less than $0 reject the project.
- 28. NPV COMPETITORSIRR PAYBACK BOOK RATE OF RETURN
- 29. Three points toRemember about NPV First the NPV Rule recognizes that a rupee today is worth more than a rupee tomorrow. NPV depends solely on the forecasted cash flow from the project and the opportunity cost of capital. Because present value are all measured in todays rupees, you can add them up.
- 30.
- 31. Payback period Theamount of time required for a firm to cover its initial investment in a project, as calculated by cash inflow.
- 32. Decision criteria Whenthe payback period is used to make accept_reject decions,the decision criteria as follows If the payback period is less than the maximum acceptable payback period, accept the project. If the payback period is greater than the maximum acceptable payback period, reject the project
- 33. Payback Example Examinethe 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.
- 34.
- 35. IRR IRR stands for Internal Rate of Return. It is a Capital Budgeting Techniqe. More difficult than NPV. The Decision Criteria If IRR > Cost of capital, Accept the project. If IRR < Cost of capital, Reject the project.
- 36. Formula of IRR.L% + [ Npvh / Npvh – Npvl ] * [ H% - L% ]
- 37.
- 38. Profitability Index Whenresources are limited, the profitability index (PI) provides a tool for selecting among various project combinations and alternatives A set of limited resources and projects can yield various combinations. The highest weighted average PI can indicate which projects to select.
- 39. NPV = sum of the P.V of cash inflow - initial investment
- 40. Choosing The CapitalInvestment When resources are Limited: The opportunity cost of capital is 10% and our company has the following opportunity . Cash Flow(RS. Millions) 12 +15 +5 -5 C 16 +20 +5 -5 B 21 +5 +30 -10 A NPV at 10 % C3 C2 C1 Project
- 41. Profitability Index: ProfitabilityIndex =Net P.V / investment
- 42. For our threeprojects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability index NPV Rs.millions Investment Rs.millions Project
- 43.