5 Investment evaluationtechniques
Bookincome
Bookrate of return Reflectbookvalues notmarketarches
Bookassets
foraccounting
Payback Number of years until forecasted IgnoresPVsad time valve ofmoney
cash flows equal initialinvestment
onlyacceptprojectsthatpayback in desired timeframe
Discounted Payback is a bitbetter andusesPVS
IRR Rateatwhichpresentvalues offuturecash flows If youlend INPV o or borrow NPVso
positive investment negative o the IRR is always gonnabe positive
i e rate atwhichNPV o
choose projectsthat have 11212higherthan Whencashflowscharge signs you'regonna
opportunity costs or selectedrateofreturn havemultipleIRRs inverterofchangesinsign
youcanalsohave IRRbutNPV so
IRRignoresmagnitudeofproject
investing I ooo f tooeven if IRRis thesame
tea.si D
Profitabilityindex investment Good to use whenresourcesare limited
as itconsiders magnitude ofproject
choose project withhighest D1
Doesn'tworkwithmultipleconstraints
NPV initialinvestment t EPVs offuturecash flows A lotofconsnotwritten on the slides
choose
project with highest NPV
Aspects of investment decisions
1 Treatinflation consistently nd r fornominal
Nomi CFs or realwithreal sameresults
i
4 Useone consistentmodelofCFforecasting
L
Bookincome
Bookrate of return Reflectbookvalues notmarketarches
Bookassets
foraccounting
Payback Number of years until forecasted IgnoresPVsad time valve ofmoney
cash flows equal initialinvestment
onlyacceptprojectsthatpayback in desired timeframe
Discounted Payback is a bitbetter andusesPVS
IRR Rateatwhichpresentvalues offuturecash flows If youlend INPV o or borrow NPVso
positive investment negative o the IRR is always gonnabe positive
i e rate atwhichNPV o
choose projectsthat have 11212higherthan Whencashflowscharge signs you'regonna
opportunity costs or selectedrateofreturn havemultipleIRRs inverterofchangesinsign
youcanalsohave IRRbutNPV so
IRRignoresmagnitudeofproject
investing I ooo f tooeven if IRRis thesame
tea.si D
Profitabilityindex investment Good to use whenresourcesare limited
as itconsiders magnitude ofproject
choose project withhighest D1
Doesn'tworkwithmultipleconstraints
NPV initialinvestment t EPVs offuturecash flows A lotofconsnotwritten on the slides
choose
project with highest NPV
Aspects of investment decisions
1 Treatinflation consistently nd r fornominal
Nomi CFs or realwithreal sameresults
i
4 Useone consistentmodelofCFforecasting
L
