FIN 300 Lecture Notes - Lecture 9: Net Present Value, Annuity, Cash Flow
24 Nov 2017
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8. 6 choosing among projects when resources are limited. The npv rule: npv rule: when choosing among investment alternatives, take the alternative with the highest npv, choosing this alternative is equivalent to receiving its npv in cash today. Assume sfl requires all projects to have a payback period of two years or less. In order to implement the payback rule, we need to know whether the sum of the inflows from the project will exceed the initial investment before the end of 2 years. The project has inflows of million per year and an initial investment of . 6 million. The sum of the cash flows from year 1 to year 2 is m 2 = million, this will not cover the initial investment of . 6 million. Because the payback is > 2 years (3 years required . Instead it simply sums the cash flows and compares them to a cash outflow in the present.
