MGMT-6054 Lecture Notes - Lecture 9: Fanshawe College, Payback Period, Financial Analysis
Document Summary
Consider net present value, cash flows, rate of return, probability of success, reality of assumptions and constraints. Payback period analysis: net present value (npv) analysis, internal rate of return (irr, cost-benefit analysis (cba) The discount/interest rate at which npv = 0. The higher the projected irr on a project, and the greater the amount by which it exceeds the cost of capital, the higher the net cash flows to the company. That is, the project looks profitable and management should proceed with it. On the other hand, if the irr is lower than the cost of capital, the rule declares that the best course of action is to forego the project or investment. Example: if irr is 21% and weighted cost of capital is 10%, it would be a great investment. Based on a series of cash flows and a discount rate of 8%, npv is calculated to be .
