CCT321H5 Lecture Notes - Lecture 7: Net Present Value, Decision Rule, Cash Flow
11 May 2020
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Document Summary
Ignores the time value of money: requires an arbitrary cutoff point, biased against long-term projects, such as research and development, and new. Ignores cash flows beyond the cutoof date projects: ex. a company has the following three investment opportunities. Internal rate of return (irr: this is the most important alternative to npv, often used in practice and is intuitively appealing. It is based entirely on the estimated cash flows and is independent of interest rates found elsewhere. Irr is the return that makes the npv = 0: decision rule, accept the project if the irr is greater than the required return. Investment rule: take any investment where the irr exceeds the cost of capital. Turn down any investment whose irr is less than the cost of capital: advantages, knowing a return is intuitively appealing. It is a simple way to communicate the value of a project to someone who doesn"t know all the estimation details.
