file:///Cnhers/sarafownloadinNC33 10,BC-lec07%20TIpdf Profitability Index Profitability Index (PI) is the ratio of the present value of future cash FINC301 flows and the initial cost of a project: PV PV PI CFo Io Decision Criterion Using PI . For independent projects: Accept all projects with Pl greater than 1 (this is identical to the NPV rule) For mutually exclusive projects: Among the projects with PI greater than 1, accept the one with the highest Pl. Slide 8 Lecture 7: Capital Budgeting & Cost of Capital O Type here to search FINO 3 10-BC-led7%20( 1 ) pdf Profitability Index PI Gives The Same Answer As NPV When 1. There is only one cash outflow, which is at time 0 2. Only one project is under consideration FINC301 Shortcomings: . Pl ignores scale, can lead to wrong answers in comparing mutually exclusive projects CF0 . .F IRRI NPV at 10% PI at 10% Project 1 |-1,000|2,000| 100%. Project 2 Project 2-1|-1,000 | 1,600 | 60% 818.18 -1.82 1,272.73 1.64 454.551.45 . -2,000 | 3,600 80% Use NPV! Slide 9 Lecture 7: Capital Budgeting & Cost of Capital Type here to search 4. Lecture PPT slide 10 A. 0.595 B. 0.529 C. 0.824 None is correct. I will compute my own ans D. wer Lecture PPT slide 10. Question changed to- Suppose a buyer wishes to purchase this project but pay for it one year from now. How much should you ask for? A. 0.824 B. 0.78 C. 0.63 D. .595 5. 6. Lecture PPT slide 10. Compute how much is one dollar in two years worth at t-1. That is to find A. 0.824 B. 0.78 C. 0.944 D. 1.059 xFINC301 FINC301 rs/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) IRR Defined By Solution To: FINC301 CFt CF1 (1 + IRR) t (1 + IRR)2 2 = 0 Decision Criterion Using IRR . For independent projects: Accept a project if its IRR is greater than some required rate of return, the threshold rate For mutually exclusive projects: Among the projects having IRRs greater than the required rate of return, accept the one with the highest IRR Slide 10 Tecture 7 Canital Rudnetinn & Cost of Canital 2Practice,Chapoo. aFINC310.BC JecosparFINC310C7 phomework 3 quest.pa xFINC301 x + sers/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) IRR Rule Leads To The Same Decisions As NPV If 1. There is only one cash outflow, which occurs at time 0 2. Only one project is under consideration 3. All future cashflows are positive FINC301 Shortcomings: . Non-existent or multiple IRRs in certain cases incore ags fr cpringutual exclusive projects . Ignore scale Use NPV Lecture 7: Capital Budgeting&Cost of Capital Slide 11 Practice Chapoo8.pdf FINC3310,8C Jleco6.pdf FINC3310 BC lec07.pdf homework 3 quest..pdf XFINC301 DFINC301 s/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Examples: Non-existence of IRR FINC301 CF01 CF, | CF2 Project 1105 250150 Project 2 105-250 150 No IRR exists for these two projects CFO CFI CF2 Project 3 60155 100 Two IRR exist for Project 3, RR-25%, IRR-33.33% . Lecture 7: Capital Budgeting &Cost of Capital Slide 12 Practice-Chapo8.pdf FINC3310 Bc_leco6.pdf FNC3310,8C_leco7.pa homework 3 quest..po Ef ^ XFINC301 /Users/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Example: Multiple IRR's FINC301 CF Project 1500,000 1,575,000-1,653,750 578,815 11 Project 2 |500,000 | 1.605,000 |-1,716,900 | 612040 CFo CF2 CF3 0 10% Slide 13 Lecture 7: Capital Budgeting&Cost of Capital FNC3310,Klec06..pdf E, FINC 3310,BC-lec07.pdf homework 3 quest...pof ^ ^ Practice,Chap008.pdf wl e arch FINC301 as/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Example: Incorrect project ranking using IRR for mutually exclusive projects: a) Projects of different scales: FINC301 CFO | CF. | IRR | NPV at 10% Project 1 |-10.000 | 20.000 100% | 8,181.82 Project 21-20.000 | 36.000 | 80% | 1272727 Slide 14 Lecture 7: Capital Budgeting& Cost of Capital c06 pdfFINC3310,8C leco7 pdt homework 3 quest... of Practice Chapoo8.pdf FINC3310 prin XFINC301 FINC301 Users/saras/Downloads/FINC3310 BC lec07.pdf The Practice of Capital Budgeting Comparison of Methods Used by Large U.S. and Multinational Firms FINC301 Large U.S. Firms Percentage UsingUse Multi-Nationals Use as Each Method Primary Method Secondary Method Payback Period | IRR NPV Other 80.3% 65.5 67.6 5.0% 65.3 16.5 2.5 37.6% 14.6 30.0 3.2 Lecture 7: Capital Budgeting&Cost of Capital Slide 15 Practice,Chapoo8 pof FINC3310 BC, leco6.pdf FINC3310 BC lec07.pdf homework 3 quest...pod rch file:///Cnhers/sarafownloadinNC33 10,BC-lec07%20TIpdf Profitability Index Profitability Index (PI) is the ratio of the present value of future cash FINC301 flows and the initial cost of a project: PV PV PI CFo Io Decision Criterion Using PI . For independent projects: Accept all projects with Pl greater than 1 (this is identical to the NPV rule) For mutually exclusive projects: Among the projects with PI greater than 1, accept the one with the highest Pl. Slide 8 Lecture 7: Capital Budgeting & Cost of Capital O Type here to search FINO 3 10-BC-led7%20( 1 ) pdf Profitability Index PI Gives The Same Answer As NPV When 1. There is only one cash outflow, which is at time 0 2. Only one project is under consideration FINC301 Shortcomings: . Pl ignores scale, can lead to wrong answers in comparing mutually exclusive projects CF0 . .F IRRI NPV at 10% PI at 10% Project 1 |-1,000|2,000| 100%. Project 2 Project 2-1|-1,000 | 1,600 | 60% 818.18 -1.82 1,272.73 1.64 454.551.45 . -2,000 | 3,600 80% Use NPV! Slide 9 Lecture 7: Capital Budgeting & Cost of Capital Type here to search 4. Lecture PPT slide 10 A. 0.595 B. 0.529 C. 0.824 None is correct. I will compute my own ans D. wer Lecture PPT slide 10. Question changed to- Suppose a buyer wishes to purchase this project but pay for it one year from now. How much should you ask for? A. 0.824 B. 0.78 C. 0.63 D. .595 5. 6. Lecture PPT slide 10. Compute how much is one dollar in two years worth at t-1. That is to find A. 0.824 B. 0.78 C. 0.944 D. 1.059 xFINC301 FINC301 rs/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) IRR Defined By Solution To: FINC301 CFt CF1 (1 + IRR) t (1 + IRR)2 2 = 0 Decision Criterion Using IRR . For independent projects: Accept a project if its IRR is greater than some required rate of return, the threshold rate For mutually exclusive projects: Among the projects having IRRs greater than the required rate of return, accept the one with the highest IRR Slide 10 Tecture 7 Canital Rudnetinn & Cost of Canital 2Practice,Chapoo. aFINC310.BC JecosparFINC310C7 phomework 3 quest.pa xFINC301 x + sers/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) IRR Rule Leads To The Same Decisions As NPV If 1. There is only one cash outflow, which occurs at time 0 2. Only one project is under consideration 3. All future cashflows are positive FINC301 Shortcomings: . Non-existent or multiple IRRs in certain cases incore ags fr cpringutual exclusive projects . Ignore scale Use NPV Lecture 7: Capital Budgeting&Cost of Capital Slide 11 Practice Chapoo8.pdf FINC3310,8C Jleco6.pdf FINC3310 BC lec07.pdf homework 3 quest..pdf XFINC301 DFINC301 s/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Examples: Non-existence of IRR FINC301 CF01 CF, | CF2 Project 1105 250150 Project 2 105-250 150 No IRR exists for these two projects CFO CFI CF2 Project 3 60155 100 Two IRR exist for Project 3, RR-25%, IRR-33.33% . Lecture 7: Capital Budgeting &Cost of Capital Slide 12 Practice-Chapo8.pdf FINC3310 Bc_leco6.pdf FNC3310,8C_leco7.pa homework 3 quest..po Ef ^ XFINC301 /Users/saras/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Example: Multiple IRR's FINC301 CF Project 1500,000 1,575,000-1,653,750 578,815 11 Project 2 |500,000 | 1.605,000 |-1,716,900 | 612040 CFo CF2 CF3 0 10% Slide 13 Lecture 7: Capital Budgeting&Cost of Capital FNC3310,Klec06..pdf E, FINC 3310,BC-lec07.pdf homework 3 quest...pof ^ ^ Practice,Chap008.pdf wl e arch FINC301 as/Downloads/FINC3310 BC lec07.pdf Internal Rate of Return (IRR) Example: Incorrect project ranking using IRR for mutually exclusive projects: a) Projects of different scales: FINC301 CFO | CF. | IRR | NPV at 10% Project 1 |-10.000 | 20.000 100% | 8,181.82 Project 21-20.000 | 36.000 | 80% | 1272727 Slide 14 Lecture 7: Capital Budgeting& Cost of Capital c06 pdfFINC3310,8C leco7 pdt homework 3 quest... of Practice Chapoo8.pdf FINC3310 prin XFINC301 FINC301 Users/saras/Downloads/FINC3310 BC lec07.pdf The Practice of Capital Budgeting Comparison of Methods Used by Large U.S. and Multinational Firms FINC301 Large U.S. Firms Percentage UsingUse Multi-Nationals Use as Each Method Primary Method Secondary Method Payback Period | IRR NPV Other 80.3% 65.5 67.6 5.0% 65.3 16.5 2.5 37.6% 14.6 30.0 3.2 Lecture 7: Capital Budgeting&Cost of Capital Slide 15 Practice,Chapoo8 pof FINC3310 BC, leco6.pdf FINC3310 BC lec07.pdf homework 3 quest...pod rch