Table of Contents
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What Is capital budgeting?
Steps
An Example of Mutually Exclusive Projects
Normal Project
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What is the payback period?
Payback for Project L (Long: Most CFs in out years)
Project S (Short: CFs come quickly)
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Net Present Value (NPV)
What is Project L’s NPV?
Calculator Solution
Rationale for the NPV Method
Using NPV method, which project(s) should be accepted?
Internal Rate of Return (IRR)
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What is Project L’s IRR?
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Rationale for the IRR Method
IRR Acceptance Criteria
Using IRR method, which project(s) should be accepted?
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Construct NPV Profiles
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To Find the Crossover Rate
Why do NPV profiles cross?
Reinvestment Rate Assumptions
Managers prefer IRR to NPV. Can we give them a better IRR?
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Why use MIRR rather than IRR?
Pavillion Project: NPV and IRR?
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Logic of Multiple IRRs
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Accept Project P?
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