Ch 9- NPV and Investment Criteria Flashcards

1
Q

Why do companies like NPVs that are positive

A

because it creates value for people!!!

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2
Q

What is the most important alternative to NPV

A

IRR

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3
Q

What is IRR based on?

A

estimated cash flows and is independant of interest rates found elsewhere

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4
Q

defintion of IRR

A

the IRR is the return that makes the NPV 0

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5
Q

If someone asks you what is the project’s rate of return?

A

IT IS ASKING ABOUT IRR!!

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6
Q

What is the decision rule with IRR

A

accept the project if the IRR> Required return

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7
Q

Can you calculate IRR without a financial calcualtor

A

NO!

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8
Q

HOW TO DO A QQUESTION ABOUT IRR ON CALCULATOR

A

ENTER THE NUMBERS LIKE U DID FOR NPV

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9
Q

Is the IRR line a straight line?

A

NO! it changes its slope based on the discount rate

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10
Q

How to read the NPV profile chart? Slide 9-188

A

-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

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11
Q

Does IRR account for TVM

A

YES ebcause the further out a cash flow is the more it is discounted

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12
Q

Does the IRR account for risk of cash flows

A

YES

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13
Q

Does IRR indicate the increase in value FOR A FIRM?

A

NO!

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14
Q

Cons of IRR

A

NPV and IRR give us the same decision usually
(besides when there is non conentional cash flows)

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15
Q

what is non conventional cash flows

A

negative CF to Positive CF to Negative CF

or basically when there is 2 sign changes or more

this can happen quite easily

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16
Q

if sign changes more than once then you have two irr’s !!, what does this look like graphically

A

word

it is a parabola!!!! because there are two instances of when NPV=0

17
Q

IRR and mutually exclusive projects

A

NPV- choose the highest NPV
OR
IRR- choose the highest IRR

18
Q

What are not mutually exclusive criteria?

A

NPV >0
pacyabck <2y
disc pay back <3y
AAR > required return
IRR > requried return

19
Q
A