FIN 380 Chapter Notes - Chapter 12: Risk Measure, Net Present Value, Cash Flow
Document Summary
Capital budgeting - the whole process of analyzing projects and deciding whether they should be included in the capital budget. Therefore, the following measures have been established for screening projects and deciding which to accept or reject: Internal rate of return (irr: net present value (npv, modified internal rate of return (mirr, profitability index (pi, regular payback, discounted payback. The fi(cid:396)st step i(cid:374) p(cid:396)oje(cid:272)t a(cid:374)al(cid:455)sis is to esti(cid:373)ate the p(cid:396)oje(cid:272)t"s e(cid:454)pe(cid:272)ted (cid:272)ash flo(cid:449)s. Weighted a(cid:448)e(cid:396)age (cid:272)ost of (cid:272)apital (cid:894)wacc(cid:895) (cid:396)efle(cid:272)ts the a(cid:448)e(cid:396)age (cid:396)isk of all the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s projects and that the appropriate cost of capital for a particular project may differ from the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s wacc. Net present value(npv) - the p(cid:396)ese(cid:374)t (cid:448)alue of the p(cid:396)oje(cid:272)t"s e(cid:454)pe(cid:272)ted futu(cid:396)e (cid:272)ash flo(cid:449)s, discounted at the appropriate cost of capital. Npv is a direct measure of the value of the project to shareholders. Npv = cf0 + ((cf1/(1 + r)1) + ((cf2/(1 + r)2) + ((cf3/(1 + r)3(cid:895) + .
