Ch 9- NPV and Investment Criteria Flashcards
Why do companies like NPVs that are positive
because it creates value for people!!!
What is the most important alternative to NPV
IRR
What is IRR based on?
estimated cash flows and is independant of interest rates found elsewhere
defintion of IRR
the IRR is the return that makes the NPV 0
If someone asks you what is the project’s rate of return?
IT IS ASKING ABOUT IRR!!
What is the decision rule with IRR
accept the project if the IRR> Required return
Can you calculate IRR without a financial calcualtor
NO!
HOW TO DO A QQUESTION ABOUT IRR ON CALCULATOR
ENTER THE NUMBERS LIKE U DID FOR NPV
Is the IRR line a straight line?
NO! it changes its slope based on the discount rate
How to read the NPV profile chart? Slide 9-188
-The x axis is the discount rate in % intervals
-the y axis is the NPV
You are looking for where the line crosses the x-axis and the NPV becomes 0, THIS IS THE IRR
Does IRR account for TVM
YES ebcause the further out a cash flow is the more it is discounted
Does the IRR account for risk of cash flows
YES
Does IRR indicate the increase in value FOR A FIRM?
NO!
Cons of IRR
NPV and IRR give us the same decision usually
(besides when there is non conentional cash flows)
what is non conventional cash flows
negative CF to Positive CF to Negative CF
or basically when there is 2 sign changes or more
this can happen quite easily
