Net Present Value and Other Investment Criteria
What is the Criterion?
Maximizing Firm Value
)1(
0
N
tt
t
r
CFPV
What is the Criterion?
• Net Present Value
N
tt
t
r
CFCFNPV
10
)1(
What is the Criterion?
• Profitability Index
0
1)1/(
CF
rCFPI
N
t
tt
What is the Criterion?
• Internal Rate of Return
N
tt
t
IRR
CFCF
NPVIRR
10
)1(
0
What is the Criterion?
• Pay Back
• Average Accounting Rate of Return
Np
ttCFCF
10
N
t t
t
BookEquity
NetIncome
NAAR
1
1
Problem 17
Year Cash Flow (A) Cash Flow (B)
0 -$180,000 -$18,000
1 10,000 10,000
2 25,000 5,000
3 25,000 3,000
4 380,000 20,000
Problem 17
PaybackPeriod Cum CF(A) Cum CF(B)
1 10000 10000
2 35000 15000
3 60000 18000
4 440000 38000
Discounted Pay BackDiscounted Discounted
Time Cum CF (A) Cum CF (B)
1 8696 8696
2 27599 12476
3 44037 14449
4 261303 25884
Problem 17
NPV, Profitability Index, and IRR
• Discount Rate NPV (A) NPV (B)
• 0.00% $ 260,000 $ 20,000
• 5.00% $ 186,422 $ 15,105
• 10.00% $ 128,080 $ 11,137
• 15.00% $ 81,303 $ 7,884
• 20.00% $ 43,418 $ 5,187
• 25.00% $ 12,448 $ 2,928
• 30.00% $ (13,087) $ 1,019
• 35.00% $ (34,308) $ (608)
Profitability Index Project A Project B
@ 15%
IRR Project A Project B
Problem 17
NPV Profiles for Projects A & B
$(50,000)
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%
Discount Rates
NP
Vs Project A
Project B
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