Finance 302 Course Notes
Finance 302 Course Notes 302
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This 3 page Study Guide was uploaded by Julio Garcia on Sunday February 8, 2015. The Study Guide belongs to 302 at University of Miami taught by Roger Peterson in Fall2014. Since its upload, it has received 62 views. For similar materials see FIN in Finance at University of Miami.
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Date Created: 02/08/15
Chapter 8 Capital Investment Decision Criteria March 2 2015 OverView of Capital Budgeting and its relationship to Value Creation 0 Any asset that a company buys 0 Can be large or small Remaining issues 1 How is cash ow determined 2 How do we make the investment decision 3 How do we incorporate uncertainty into the decision Putting a dollar value on uncertainty 4 How do we determine our shareholders required return gt The goal is to make investments in which the Value gt Cost worth more than it costs Net Present Value NPV Value Cost Internal Rate of Return IRR does not always give the right answer Payback Period Profitability Index Discounted Payback Period Modified IRR MIRR Various accounting criteria Capital Project Analysis 0 Cash ows every year that can change 0 Salvage Value cash sales proceeds after you sell investment after its useful amount of years Example a truck you use over time and sell it later when it is not economically useful Net Present Value 0 Present value it back to time 0 0 Difference between value and cost 0 Equals expected wealth created 0 Decision Rule If NPV is positive accept the project You do it as long as you believe in the forecast Payback Period How long does it take to get the initial investment back Initial investment future cash ows You do until it has all been recovered The time it takes it the payback period Advantages VS Disadvantages 0 Easy to understand Ignores time value of money 0 Adjusts for uncertainty of later cash ows 0 Biased towards liquidity gt Used for information content gt Used for evaluating risk IGNORE Section 83 Average Accounting Return Chapter 8 continued March 4 2015 Internal Rate of Return IRR Represents EAR of return on the investment 0 The next best to NPV Definition IRR is the discount rate that makes the NPV0 Decision Rule Accept the project if the IRR is greater than the required return 0 You use trail and error in order to calculate IRR BUT it is better to USE Calculator keys CF can hold up to 99 annuities cash ows I if you make time 0 equal to 0 you can get PV F01 means frequency NPV Net Present Value IRR Internal Rate of Return NPV Pro le NPV at 0 is equal to the sum of the cash ows If IRRgt required return that is good NPV vs IRR I When in doubt go with NPV because it is always correct IRR and Nonconventional Cash Flows HaVing multiple IRRs is a possibility Descartes Rule of Signs 0 You can see how many IRRs you have by counting sign changes Resulting Decision Rules 0 If NPV is positive at a required return of 15 so you should ACCEPT 0 Your calculator would give an IRR of 1011 which would tell you to REJECT 0 Therefore you don t want neither
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