TAILIEUCHUNG - Lecture Essentials of corporate finance (2/e)– Chapter 8: Net present value and other investment criteria

After studying this chapter you will be able to: Understand the payback rule and its shortcomings, understand accounting rates of return and their problems, understand the internal rate of return and its strengths and weaknesses, understand the net present value rule and why it is the best decision criteria. | Net present value and other investment criteria Chapter 8 Key concepts and skills Understand: the payback rule and its shortcomings accounting rates of return and their problems the internal rate of return and its strengths and weaknesses the net present value rule and why it provides the best decision-making criteria the modified internal rate of return the profitability index and its relation to net present value 8- Chapter outline Net present value The payback rule The average accounting return The internal rate of return The profitability index The practice of capital budgeting 8- Capital budgeting Analysis of potential projects Long-term decisions Large expenditures Difficult/Impossible to reverse Determines firm’s strategic direction 8- Good decision criteria We need to ask ourselves the following questions when evaluating decision criteria: Does the decision rule adjust for the time value of money? Does the decision rule adjust for risk? Does the decision rule provide information on whether we are creating value for the firm? 8- Net present value The difference between the market value of a project and its cost How much value is created from undertaking an investment? Step 1: Estimate the expected future cash flows. Step 2: Estimate the required return for projects of this risk level. Step 3: Find the present value of the cash flows and subtract the initial investment to arrive at the net present value. 8- Net present value Sum of the PVs of all cash flows Initial cost often is CF0 and is an outflow 8- NPV = ∑ n t = 0 CFt (1 + R)t NPV = ∑ n t = 1 CFt (1 + R)t - CF0 NOTE: t=0 NPV—Decision rule If NPV is positive, accept the project NPV > 0 means: project is expected to add value to the firm project will increase the wealth of the owners NPV is a direct measure of how well this project will achieve the goal of increasing shareholder wealth. 8- Sample project data You are looking at a new project and

• Tài chính doanh nghiệp
• Corporate finance
• Essentials of corporate finance
• Financial management
• Business finance
• Net present value
• Investment criteria
• Intermediate corporate finance
• Lecture Intermediate corporate finance
• Tài chính doanh nghiệp
• Corporate valuation
• Value based management
• Fundamentals of corporate finance
• Business organization
• International corporate finance
• Capital market history
• Raising capital
• Financial leverage
• Financial reporting
• Social welfare
• Forward contracts
• The stock markets
• Basic return concepts
• Portfolio theory
• Bond valuation
• Basic stock valuation
• Accounting for financial management
• Analysis of financial statements
• Financial planning
• Forecasting financial statements
• Capital budgeting
• Decision criteria
• Estimating cash flows
• Real options
• Capital structure decisions
• The levered firm
• Cash management
• Financial distress
• Hedging risk
• Warrants and convertibles
• Principles of corporate finance
• Understanding options
• Valuing options
• Financial analysis
• Financial manager
• Financial institutions