ACCT-311 Lecture Notes - Lecture 3: Cash Flow, Net Present Value, Opportunity Cost
25 Mar 2016
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Npv assumes reinvesing at r (opportunity cost of capital, Reinvesing at opportunity cost, r, is more realisic, so npv method is best. Npv should be used to choose between mutually exclusive projects if a conlict exists. Muliple irrs: a problem with irr: muliple irrs. Npv proile for project m: modiied irr (mirr) Cost (negaive cf) followed by a series of posiive cash inlows. Most common: cost (negaive cf), then string of posiive. For example, nuclear power plant or strip mine. Use npv instead of irr: with two irrs, npv is negaive between 0 and the irst irr but posiive between the two irrs and negaive again beyond the second irr. The npv criterion is straighforward: if the cost of capital is. 10%, its npv is negaive and the project should be rejected. In addiion to npv, mirr also avoids the problem of muliple. Irrs: mirr correctly assumes reinvestment at opportunity cost =
