Finance 313 Richey

Chapter 9
Net Present Value and Other Investment Criteria

Consider the following projects. Expected After-Tax Net Cash Flows are
given. This firms Required Rate of Return is 10%
Year Project S Project L
0 -100 -100
1 70 10
2 50 60
3 20 80

1. Calculate the payback period for each project.

2. Calculate the discounted payback period for each project.

3. Calculate the NPV for each project.

4. Calculate the IRR for each project.

5. Calculate the Profitability Index for each project.

6. Your firm is considering a three-year project with a projected net

income of $3,000 in Year 1, $5,000 in Year 2, and $9,000 in Year 3.
The cost to start the project is $15,000, which will be depreciated
over the 3-year period to zero using the straight line method. What is
the Average Accounting Return?
Finance 313 Richey
Chapter 9
Net Present Value and Other Investment Criteria

Advantages and Disadvantages of the Procedures

Procedure Advantages Disadvantages

NPV XXXXXXX
Payback Period
Discounted Payback
IRR
ARR
Profitability Index

Acceptance / Rejection Criteria of the Procedures

Procedure Accept Reject

NPV
Payback Period
Discounted Payback
IRR
ARR
Profitability Index

Problems with IRR

1. Non-Conventional Cash Flows
a. Suppose an Investment will cost $90,000 and will generate
the following cash flows: CF1 = $132,000 CF2 = $100,000
CF3 = -$150,000

Calculate the IRR IRR = %

Assuming that the firms required rate of return is 15%,

should we accept or reject the project?
Finance 313 Richey
Chapter 9
Net Present Value and Other Investment Criteria
Now, using the 15% discount rate, calculate the projects
NPV. NPV = $

What do we do?

2. Mutually Exclusive Projects

a. What does mutually exclusive mean?

b. Take a look at the following projects (From the Ch.9 PPT)

Period Project A Project B

0 -500 -400
1 325 325
2 325 200
IRR
NPV

If the company has a required return of 10%, which project

should we accept?