Lecture Notes - Week 2 - 3 slides per page

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1、FIN3CFI-CorporateFinanceCorporateFinanceTopic2.NetPresentValue,OtherInvestmentCriteriaandCashFlowCalculation;ReadingChapters7&8FacultyofBusiness,EconomicsandLawPresentedby:DrBalasinghamBalachandranAssociateProfessorinFinanceDepartmentofFinance,LaTrobeBusinessSchoolNet

2、PresentValue,OtherInvestmentCriteriaandCashFlowCalculationLearningObjectives>Outlinethedecisionrulesforeachmethodofprojectevaluation>Explaintheadvantagesanddisadvantagesofthesemethods>ExplainwhytheNetPresentValue(NPV)methodispreferredtoallothermethods>Understandhowtod

3、eterminetherelevantCFsforaproposedinvestment>UnderstandhowtoanalysetheprojectedCFsforaproposedinvestment>UnderstandhowtoestimateNPVandevaluatetheinvestment2NetPresentValue,OtherInvestmentCriteriaandCashFlowCalculationInvestmentEvaluationProcess>Evaluationofinvestmentp

4、roject→Investmentdecision>Whatlong-termassets(businesses,projects,equipment)shouldthefirminvestin?–Goalistomaximisethevalueofthefirm(toitsowners)•Primarilyaquantitativeissue(totaldollarvalueofwealthcreatedforshareholders).•Alsootherqualitativeconsiderations.31FIN3CFI-

5、CorporateFinanceNetPresentValue,OtherInvestmentCriteriaandCashFlowCalculationTypesofInvestmentProjects>Twotypesofinvestmentprojects:–Independent•Acceptancedoesnotaffectthecashflowsoracceptanceofanyotherproject–MutuallyExclusive•Whereonlyoneprojectisselectedfromagroup•

6、Acceptingoneprecludesacceptanceofanother•Commonforfirmstohavemultiplesimilaroptions(particularlyassetslikemachineryorbuildings)4NetPresentValue,OtherInvestmentCriteriaandCashFlowCalculationMethodsofProjectEvaluation>Netpresentvalue(NPV)>Internalrateofreturn(IRR)>Prese

7、ntvalueindex(PVI),alsoknownasthebenefit-costratio>Paybackperiodanddiscountedpaybackperiod>Accountingrateofreturn(ARR)>Differencesbetweenmethods:–Discountedv.non-discountedcashflows–Useofcashflowsorearningsfigures5NetPresentValue,OtherInvestmentCriteriaandCashFlowCalcu

8、lationDiscountedCashFlowMethods>Processofdiscountingaseriesoffuturecashflowstotheirpresentvalues:–Netpresentvalue(NPV)method