Principles of Corporate Finance <ul><li>Chapter 5 </li></ul><ul><li>Why Net Present Value Leads to Better Investment Decis...
GROUP  MEMBERS <ul><li>M.SAJID  10 </li></ul><ul><li>M.IRFAN SIDDIQUE  20 </li></ul><ul><li>AFZAAL SAQIM  19 </li></ul><ul...
M.Sajid 10
IRR <ul><li>IRR  stands for Internal Rate of Return. </li></ul><ul><li>It is a Capital Budgeting Techniqe. </li></ul><ul><...
<ul><li>Formula of IRR. </li></ul><ul><li>L%  + [ Npvh /  Npvh  –  Npvl  ]   *  [ H%  -  L% ] </li></ul>
PRESENT VALUE Present value is the currant dollar value of a future amount_the amount of money that would have to be inves...
FORMULA OF PERESENT  VALUE <ul><li>PV= FV /(1+i)n </li></ul><ul><li>For example how much would I have to deposit today int...
NET PRESENT VALUE <ul><li>A sophisticated capital budgeting technique; found by subtracting a projects initial investment ...
THE DECISION CRITERIA <ul><li>When NPV IS used to make accept_reject decisions, the decision criteria as follows, </li></u...
NPV  COMPETITORS <ul><li>IRR </li></ul><ul><li>PAYBACK  </li></ul><ul><li>BOOK RATE OF RETURN </li></ul>
Three points to Remember about NPV <ul><li>First the NPV Rule recognizes that a rupee today is worth more than a rupee tom...
Afzaal Saqim 19
Payback period <ul><li>The amount of time required for a firm to cover its initial investment in a project, as calculated ...
Decision criteria <ul><li>When the payback period is used to make accept_reject decions,the decision criteria as follows <...
Payback <ul><li>Example </li></ul><ul><li>Examine the three projects and note the mistake we would make if we insisted on ...
Adil Nisar 28
Profitability Index <ul><li>When resources are limited, the profitability index (PI) provides a tool for selecting among v...
NPV =  sum of the P.V of cash inflow  -  initial investment
Choosing The Capital Investment When resources are Limited: The opportunity cost of capital is 10% and our company has the...
Profitability Index: Profitability Index =Net P.V / investment
For our three projects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability i...
Arslan Yousaf 18
PRESENT VALUE Present value is the currant dollar value of a future amount_the amount of money that would have to be inves...
FORMULA OF PERESENT  VALUE <ul><li>PV= FV /(1+i)n </li></ul><ul><li>For example how much would I have to deposit today int...
NET PRESENT VALUE <ul><li>A sophisticated capital budgeting technique; found by subtracting a projects initial investment ...
THE DECISION CRITERIA <ul><li>When NPV IS used to make accept_reject decisions, the decision criteria as follows, </li></u...
NPV  COMPETITORS <ul><li>IRR </li></ul><ul><li>PAYBACK  </li></ul><ul><li>BOOK RATE OF RETURN </li></ul>
Three points to Remember about NPV <ul><li>First the NPV Rule recognizes that a rupee today is worth more than a rupee tom...
Fahad Mushtaq 24
Payback period <ul><li>The amount of time required for a firm to cover its initial investment in a project, as calculated ...
Decision criteria <ul><li>When the payback period is used to make accept_reject decions,the decision criteria as follows <...
Payback <ul><li>Example </li></ul><ul><li>Examine the three projects and note the mistake we would make if we insisted on ...
Sana Javed 38
IRR <ul><li>IRR  stands for Internal Rate of Return. </li></ul><ul><li>It is a Capital Budgeting Techniqe. </li></ul><ul><...
<ul><li>Formula of IRR. </li></ul><ul><li>L%  + [ Npvh /  Npvh  –  Npvl  ]   *  [ H%  -  L% ] </li></ul>
Zawar Husain 51
Profitability Index <ul><li>When resources are limited, the profitability index (PI) provides a tool for selecting among v...
NPV =  sum of the P.V of cash inflow  -  initial investment
Choosing The Capital Investment When resources are Limited: The opportunity cost of capital is 10% and our company has the...
Profitability Index: Profitability Index =Net P.V / investment
For our three projects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability i...
 
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Cooperate finance

  1. 2. Principles of Corporate Finance <ul><li>Chapter 5 </li></ul><ul><li>Why Net Present Value Leads to Better Investment Decisions than Other Criteria </li></ul>
  2. 3. GROUP MEMBERS <ul><li>M.SAJID 10 </li></ul><ul><li>M.IRFAN SIDDIQUE 20 </li></ul><ul><li>AFZAAL SAQIM 19 </li></ul><ul><li>ADIL NISAR 28 </li></ul><ul><li>ARSALAN YOUSAF 18 </li></ul><ul><li>FAHAD MUSHTAQ 24 </li></ul><ul><li>SANA JAVED 38 </li></ul><ul><li>ZAWAR HUSSAIN 51 </li></ul>
  3. 4. M.Sajid 10
  4. 5. IRR <ul><li>IRR stands for Internal Rate of Return. </li></ul><ul><li>It is a Capital Budgeting Techniqe. </li></ul><ul><li>More difficult than NPV. </li></ul><ul><li>The Decision Criteria </li></ul><ul><li>If IRR > Cost of capital, Accept the project. </li></ul><ul><li>If IRR < Cost of capital, Reject the project. </li></ul>
  5. 6. <ul><li>Formula of IRR. </li></ul><ul><li>L% + [ Npvh / Npvh – Npvl ] * [ H% - L% ] </li></ul>
  6. 7. PRESENT VALUE Present value is the currant dollar value of a future amount_the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.
  7. 8. FORMULA OF PERESENT VALUE <ul><li>PV= FV /(1+i)n </li></ul><ul><li>For example how much would I have to deposit today into a account paying 7% annual interest to accumulate 3000$ at the end of 5 years. </li></ul>
  8. 9. NET PRESENT VALUE <ul><li>A sophisticated capital budgeting technique; found by subtracting a projects initial investment from the present value of its cash inflows discounted at a rate equal to the firms cost of capital </li></ul><ul><li>NPV= Present value of cash inflows - Initial investment </li></ul>
  9. 10. THE DECISION CRITERIA <ul><li>When NPV IS used to make accept_reject decisions, the decision criteria as follows, </li></ul><ul><li>If the NPV is greater than $0 accept the project. </li></ul><ul><li>If the NPV is less than $0 reject the project. </li></ul>
  10. 11. NPV COMPETITORS <ul><li>IRR </li></ul><ul><li>PAYBACK </li></ul><ul><li>BOOK RATE OF RETURN </li></ul>
  11. 12. Three points to Remember about NPV <ul><li>First the NPV Rule recognizes that a rupee today is worth more than a rupee tomorrow. </li></ul><ul><li>NPV depends solely on the forecasted cash flow from the project and the opportunity cost of capital. </li></ul><ul><li>Because present value are all measured in todays rupees, you can add them up. </li></ul>
  12. 13. Afzaal Saqim 19
  13. 14. Payback period <ul><li>The amount of time required for a firm to cover its initial investment in a project, as calculated by cash inflow. </li></ul>
  14. 15. Decision criteria <ul><li>When the payback period is used to make accept_reject decions,the decision criteria as follows </li></ul><ul><li>If the payback period is less than the maximum acceptable payback period, accept the project. </li></ul><ul><li>If the payback period is greater than the maximum acceptable payback period, reject the project </li></ul>
  15. 16. Payback <ul><li>Example </li></ul><ul><li>Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less. </li></ul>
  16. 17. Adil Nisar 28
  17. 18. Profitability Index <ul><li>When resources are limited, the profitability index (PI) provides a tool for selecting among various project combinations and alternatives </li></ul><ul><li>A set of limited resources and projects can yield various combinations. </li></ul><ul><li>The highest weighted average PI can indicate which projects to select. </li></ul>
  18. 19. NPV = sum of the P.V of cash inflow - initial investment
  19. 20. Choosing The Capital Investment When resources are Limited: The opportunity cost of capital is 10% and our company has the following opportunity . Cash Flow(RS. Millions) 12 +15 +5 -5 C 16 +20 +5 -5 B 21 +5 +30 -10 A NPV at 10 % C3 C2 C1 Project
  20. 21. Profitability Index: Profitability Index =Net P.V / investment
  21. 22. For our three projects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability index NPV Rs.millions Investment Rs.millions Project
  22. 23. Arslan Yousaf 18
  23. 24. PRESENT VALUE Present value is the currant dollar value of a future amount_the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.
  24. 25. FORMULA OF PERESENT VALUE <ul><li>PV= FV /(1+i)n </li></ul><ul><li>For example how much would I have to deposit today into a account paying 7% annual interest to accumulate 3000$ at the end of 5 years. </li></ul>
  25. 26. NET PRESENT VALUE <ul><li>A sophisticated capital budgeting technique; found by subtracting a projects initial investment from the present value of its cash inflows discounted at a rate equal to the firms cost of capital </li></ul><ul><li>NPV= Present value of cash inflows - Initial investment </li></ul>
  26. 27. THE DECISION CRITERIA <ul><li>When NPV IS used to make accept_reject decisions, the decision criteria as follows, </li></ul><ul><li>If the NPV is greater than $0 accept the project. </li></ul><ul><li>If the NPV is less than $0 reject the project. </li></ul>
  27. 28. NPV COMPETITORS <ul><li>IRR </li></ul><ul><li>PAYBACK </li></ul><ul><li>BOOK RATE OF RETURN </li></ul>
  28. 29. Three points to Remember about NPV <ul><li>First the NPV Rule recognizes that a rupee today is worth more than a rupee tomorrow. </li></ul><ul><li>NPV depends solely on the forecasted cash flow from the project and the opportunity cost of capital. </li></ul><ul><li>Because present value are all measured in todays rupees, you can add them up. </li></ul>
  29. 30. Fahad Mushtaq 24
  30. 31. Payback period <ul><li>The amount of time required for a firm to cover its initial investment in a project, as calculated by cash inflow. </li></ul>
  31. 32. Decision criteria <ul><li>When the payback period is used to make accept_reject decions,the decision criteria as follows </li></ul><ul><li>If the payback period is less than the maximum acceptable payback period, accept the project. </li></ul><ul><li>If the payback period is greater than the maximum acceptable payback period, reject the project </li></ul>
  32. 33. Payback <ul><li>Example </li></ul><ul><li>Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less. </li></ul>
  33. 34. Sana Javed 38
  34. 35. IRR <ul><li>IRR stands for Internal Rate of Return. </li></ul><ul><li>It is a Capital Budgeting Techniqe. </li></ul><ul><li>More difficult than NPV. </li></ul><ul><li>The Decision Criteria </li></ul><ul><li>If IRR > Cost of capital, Accept the project. </li></ul><ul><li>If IRR < Cost of capital, Reject the project. </li></ul>
  35. 36. <ul><li>Formula of IRR. </li></ul><ul><li>L% + [ Npvh / Npvh – Npvl ] * [ H% - L% ] </li></ul>
  36. 37. Zawar Husain 51
  37. 38. Profitability Index <ul><li>When resources are limited, the profitability index (PI) provides a tool for selecting among various project combinations and alternatives </li></ul><ul><li>A set of limited resources and projects can yield various combinations. </li></ul><ul><li>The highest weighted average PI can indicate which projects to select. </li></ul>
  38. 39. NPV = sum of the P.V of cash inflow - initial investment
  39. 40. Choosing The Capital Investment When resources are Limited: The opportunity cost of capital is 10% and our company has the following opportunity . Cash Flow(RS. Millions) 12 +15 +5 -5 C 16 +20 +5 -5 B 21 +5 +30 -10 A NPV at 10 % C3 C2 C1 Project
  40. 41. Profitability Index: Profitability Index =Net P.V / investment
  41. 42. For our three projects the profitability index is calculated as follows: 2.1 21 10 A 2.4 12 5 C 3.2 16 5 B Profitability index NPV Rs.millions Investment Rs.millions Project

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