FNCE30002 Lecture Notes - Lecture 6: 2-Step Garage, Three Steps, Payback Period
Document Summary
Capital budgeting ii: sensitivity, break-even and decision tree analyses. Rankings of techniques used when evaluating new projects: Internal rate of return: net present value, payback period, sensitivity analysis, real options analysis, accounting rate of return. Managerial time/attention is a scarce resource: managers need to understand what makes a project tick, dedicate time to the most needed aspects of project evaluation, role of financial managers isn"t simply to say "yes/no" to projects. Trying to find which variables the project"s success is most sensitive to. Involves assessing impact of changes/errors in variable estimates on project"s npv: highlights fact that estimates of projects can change over time, or we measure them with error (model risk) Greater the range, the more important the variable used as ranking mechanism. Note: there is only one npv for a project which is calculated using the expected values of variables, all other. Indicates areas where management should direct effect once the project begins strategic insight into project management.
