Fundamentals of Corporate Finance Third edition Chapter 6 Net present Brealey Myers Marcus Value and Other ndamentals of Corporate Finan Investment Criteria Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 1 Irwin/McGraw-Hill Chapter 6 Fundamentals of Corporate Finance Third Edition Net Present Value and Other Investment Criteria Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
6-2 Topics Covered SNet Present Value SOther Investment criteria pRoject Interactions Capital rationing Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 2 Irwin/McGraw-Hill Topics Covered Net Present Value Other Investment Criteria Project Interactions Capital Rationing
6-3 Net present Value Net Present value- Present value of cash flows minus initial investments Opportunity Cost of Capital -Expected rate of return given up by investing in a project Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 3 Irwin/McGraw-Hill Net Present Value Opportunity Cost of Capital - Expected rate of return given up by investing in a project. Net Present Value - Present value of cash flows minus initial investments
6-4 Net present Value Example Suppose we can invest $50 today and receive $60 in one year. What is our increase in value given a 10% expected return? 60 Profit=-50+ =$4.55 1.10 $4.55 Added value $50 Initial Investment This is the definition of npv Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 4 Irwin/McGraw-Hill Net Present Value Example Suppose we can invest $50 today and receive $60 in one year. What is our increase in value given a 10% expected return? This is the definition of NPV Profit = -50 + 60 1.10 = $4.55 Initial Investment Added Value $50 $4.55
6-5 Net present Value NPV=PV- required investment NPV=C+ (1+r) C NPV=co+ 2+ (1+r)(1+r) 2 (1+r Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 5 Irwin/McGraw-Hill Net Present Value NPV = PV - required investment NPV C C r t t = + + 0 (1 ) NPV C C r C r C r t t = + + + + + + + 0 1 1 2 2 (1 ) (1 ) 1 ... ( )