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9.2
Lecture Outline
Question: are we creating value for the firm?
Do not forget about TVM and risk.
9.3
McGraw-Hill/Irwin
9.4
McGraw-Hill/Irwin
9.5
Year 0: CF = -165,000
Year 1: CF = 63,120;
Year 2: CF = 70,800;
Year 3: CF = 91,080;
9.6
McGraw-Hill/Irwin
9.7
McGraw-Hill/Irwin
9.8
9.9
Compute IRR
NPV Profile For The Project
IRR = 16.13%
McGraw-Hill/Irwin
9.10
McGraw-Hill/Irwin
9.11
9.12
9.13
NPV Profile
IRR = 10.11% and 42.66%
McGraw-Hill/Irwin
9.14
McGraw-Hill/Irwin
9.15
Project A Project B
-500
-400
325
325
325
200
IRR
19.43%
22.17%
NPV
64.05
60.74
McGraw-Hill/Irwin
Which project
should you accept
and why?
9.16
NPV Profiles
IRR for A = 19.43%
IRR for B = 22.17%
Crossover Point = 11.8%
McGraw-Hill/Irwin
9.17
9.18
McGraw-Hill/Irwin
9.19
McGraw-Hill/Irwin
9.20
Year 1: NI = 13,620;
Year 2: NI = 3,300;
Year 3: NI = 29,100;
average book value 72,000.
require an average accounting return of 25%
9.21
Profitability Index
Measures the benefit per unit cost, based on
the time value of money
A profitability index of 1.1 implies that for
every $1 of investment, we create an
additional $0.10 in value
This measure can be very useful in situations
where we have limited capital
McGraw-Hill/Irwin
9.22
McGraw-Hill/Irwin
Disadvantages of NPV
May be difficult to
communicate
May be difficult to
calculate
Does not account for
liquidity needs
9.23
McGraw-Hill/Irwin