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-panies, Inc.,2001 Topics Covered Net Present Value Other Investment Criteria Project Interactions Capital Rationing 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. 本资料来源 当前文档修改密码:83628 更多资料请访问精品资料网() 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 Initial Investment Added Value $50 $ Net Present Value NPV = PV - required investment Net Present Value Terminology C = Cash Flow t = time period of the investment r = “opportunity cost of capital” The Cash Flow could be positive or negative at any time period. Net Present Value Net Present Value Rule Managers increase shareholders’ wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with a present value. Net Present Value Example You have the opportunity to purchase an office building. You have a tenant lined up that will generate $16,000 per year in cash flows for three years. At the end of three years you anticipate selling the building for $450,000. How much would you be willing to pay for the building? Net Present Value 0 1 2 3 $16,000 $16,000 $16,000 $450,000 $466,000 Present Value 14,953 14,953 380,395 $409,323 Example - continued