1 / 15

Business Finance

Business Finance. BA303 Michael Dimond. If you require a 12% annual return, what would you pay for… …$90 to be delivered in 1 year? ($80.3571) …$95 to be delivered in 2 years? ($75.7334) …$99 to be delivered in 3 years? ($70.4662) …all of the above?

nita
Télécharger la présentation

Business Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Business Finance BA303Michael Dimond

  2. If you require a 12% annual return, what would you pay for… …$90 to be delivered in 1 year? ($80.3571) …$95 to be delivered in 2 years? ($75.7334) …$99 to be delivered in 3 years? ($70.4662) …all of the above? By adding together the present values, you find the value of allthe cash flows in the stream. Discounting unequal cash flows i = 12% ? 99 90 95 0 1 2 3 90 ÷ (1+0.12)1 80.3571 75.7334 + 70.4662 226.5567 There’s an easier way… kind of. 95 ÷ (1+0.12)2 99 ÷ (1+0.12)3

  3. Using the calculator (NPV function) • NPV(12,0,{100,200,300,400,500})

  4. Using the calculator (NPV function) • NPV(9,0,{100,90,80,25},{1,1,1,6})

  5. Using TVM to Make Business Decisions

  6. Project Valuation & Decision Making • How do you properly answer the fundamental question? • Applications • Operating expenditures • Capital budgeting • Marketing campaigns • Considerations • Mutually exclusive projects (vs independent projects) • Capital rationing (vs unlimited funds) • Timing • Approval process • Ranking projects • Criteria • Key Criteria: NPV, IRR, PBP • Other criteria (PI, MIRR, etc.)

  7. Pay Back Period (PBP) • How long will it take to recoup the cash outlay? • For example, a machine which costs $1,000k and saves $250k per year would pay for itself in 4 years (1,000 ÷ 250). • Therefore, the payback period would be 4 years. • What would the PBP be for this project? • What labels might be put on the cost? • Initial Investment, I0, CF0 • Why is PBP a valid criterion? • What are the weaknesses of judging projects on PBP? 0 1 2 3 4 100 100 100 100 Cost: $380

  8. Internal Rate of Return (IRR) • IRR = the “interest” implied by a stream of cash flows • If IRR > hurdle rate, project should be approved • If IRR < hurdle rate, project should be rejected • Why is IRR a valid criterion? • What are the weaknesses of judging projects on IRR?

  9. Using the calculator (IRR function) • IRR(-1100,{100,200,300,400,500})

  10. Using the calculator (IRR function) • IRR(-250,{10090,80,25},{1,1,1,6})

  11. Net Present Value (NPV) • Present value of a stream of cash flows, minus the cost • If NPV > 0, project should be approved • If NPV < 0, project should be rejected • What does NPV = 0 imply about the IRR for a project? • Why is NPV a valid criterion? • What are the weaknesses of judging projects on NPV?

  12. Using the calculator (NPV function) • Once you know the present value, how would you find NPV? • To find NPV easily, put the cost where CF0 goes in your calculator. • What if the initial investment were $1,100?

  13. Using the calculator (NPV function) • Once you know the present value, how would you find NPV? • To find NPV easily, put the cost where CF0 goes in your calculator. • What if the initial investment were $250k?

  14. Profitability Index (PI) • Puts projects into the same scale & provides a single, easy to read number • ΣPV ÷ Cost • If PI > 1, what does this imply about NPV? • If PI < 1, what does this imply about NPV? • Remember: • PI = ΣPV ÷ Cost • NPV = ΣPV – Cost

  15. Exam #2 • Tuesday, 2/19/13

More Related