BUSI 2504 Study Guide - Stock Valuation, Cash Flow, Net Present Value

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Lo1 how to compute the net present value and why it is the best decision criterion. Lo2 the payback rule and some of its shortcomings. Lo3 the discounted payback rule and some of its shortcomings. Lo4 accounting rates of return and some of the problems with them. Lo5 the internal rate of return criterion and its strengths and weaknesses. Lo7 the profitability index and its relation to net present value. Since discounted payback is calculated at the same discount rate as is npv, if npv is positive, the discounted payback period must be less than the project"s life. If npv is positive, then the present value of future cash inflows is greater than the initial investment cost; thus pi must be greater than 1. If npv is positive for a certain discount rate r, then it will be zero for some larger discount rate r*; thus the irr must be greater than the required return.