business finance
Download
Skip this Video
Download Presentation
Business Finance

Loading in 2 Seconds...

play fullscreen
1 / 15

Business Finance - PowerPoint PPT Presentation


  • 67 Views
  • Uploaded on

Business Finance. BA303 Michael Dimond. If you require a 12% annual return, what would you pay for… …$90 to be delivered in 1 year? ($80.3571) …$95 to be delivered in 2 years? ($75.7334) …$99 to be delivered in 3 years? ($70.4662) …all of the above?

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Business Finance' - nita


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
business finance

Business Finance

BA303Michael Dimond

discounting unequal cash flows

If you require a 12% annual return, what would you pay for…

…$90 to be delivered in 1 year? ($80.3571)

…$95 to be delivered in 2 years? ($75.7334)

…$99 to be delivered in 3 years? ($70.4662)

…all of the above?

By adding together the present values, you find the value of allthe cash flows in the stream.

Discounting unequal cash flows

i = 12%

?

99

90

95

0

1

2

3

90 ÷ (1+0.12)1

80.3571

75.7334

+ 70.4662

226.5567

There’s an easier way… kind of.

95 ÷ (1+0.12)2

99 ÷ (1+0.12)3

using the calculator npv function
Using the calculator (NPV function)
  • NPV(12,0,{100,200,300,400,500})
using the calculator npv function1
Using the calculator (NPV function)
  • NPV(9,0,{100,90,80,25},{1,1,1,6})
project valuation decision making
Project Valuation & Decision Making
  • How do you properly answer the fundamental question?
  • Applications
    • Operating expenditures
    • Capital budgeting
    • Marketing campaigns
  • Considerations
    • Mutually exclusive projects (vs independent projects)
    • Capital rationing (vs unlimited funds)
    • Timing
    • Approval process
    • Ranking projects
  • Criteria
    • Key Criteria: NPV, IRR, PBP
    • Other criteria (PI, MIRR, etc.)
pay back period pbp
Pay Back Period (PBP)
  • How long will it take to recoup the cash outlay?
    • For example, a machine which costs $1,000k and saves $250k per year would pay for itself in 4 years (1,000 ÷ 250).
    • Therefore, the payback period would be 4 years.
    • What would the PBP be for this project?
  • What labels might be put on the cost?
    • Initial Investment, I0, CF0
  • Why is PBP a valid criterion?
  • What are the weaknesses of judging projects on PBP?

0

1

2

3

4

100

100

100

100

Cost: $380

internal rate of return irr
Internal Rate of Return (IRR)
  • IRR = the “interest” implied by a stream of cash flows
    • If IRR > hurdle rate, project should be approved
    • If IRR < hurdle rate, project should be rejected
  • Why is IRR a valid criterion?
  • What are the weaknesses of judging projects on IRR?
using the calculator irr function
Using the calculator (IRR function)
  • IRR(-1100,{100,200,300,400,500})
using the calculator irr function1
Using the calculator (IRR function)
  • IRR(-250,{10090,80,25},{1,1,1,6})
net present value npv
Net Present Value (NPV)
  • Present value of a stream of cash flows, minus the cost
    • If NPV > 0, project should be approved
    • If NPV < 0, project should be rejected
    • What does NPV = 0 imply about the IRR for a project?
  • Why is NPV a valid criterion?
  • What are the weaknesses of judging projects on NPV?
using the calculator npv function2
Using the calculator (NPV function)
  • Once you know the present value, how would you find NPV?
  • To find NPV easily, put the cost where CF0 goes in your calculator.
    • What if the initial investment were $1,100?
using the calculator npv function3
Using the calculator (NPV function)
  • Once you know the present value, how would you find NPV?
  • To find NPV easily, put the cost where CF0 goes in your calculator.
    • What if the initial investment were $250k?
profitability index pi
Profitability Index (PI)
  • Puts projects into the same scale & provides a single, easy to read number
    • ΣPV ÷ Cost
    • If PI > 1, what does this imply about NPV?
    • If PI < 1, what does this imply about NPV?
  • Remember:
    • PI = ΣPV ÷ Cost
    • NPV = ΣPV – Cost
exam 2
Exam #2
  • Tuesday, 2/19/13
ad