decision making criteria

Decision MakingCriteriaD Keck

October 3, 2016

Decision making criteria

Net present value

Internal rate of return

Discounted payback period

Payback period

Break-even analysis

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Present Value

PV = ∑ni=1

Ci

(1+k)i

NPV = PV + C0

NPV = ∑ni=0

Ci

(1+k)i

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Net present value criterion

Is the NPV of the investment greater than $0 ?

NPV > ∑ni=0

Ci

(1+k)i

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Internal rate of returncriterion

What is the investment rate of return, IRR, thatresults in a NPV of $0 ?

NPV = ∑ni=0

Ci

(1+k)i

0 = ∑ni=0

Ci

(1+IRR)i

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Discounted payback periodcriterion

How many periods, m, does the investmentrequire to have a NPV equal to $0?

NPV = ∑ni=0

Ci

(1+k)i

0 = ∑mi=0

Ci

(1+k)i

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Payback period criterion

How many periods, m, does the investmentrequire to have a NPV equal to $0?

NPV = ∑ni=0

Ci

(1+k)i

0 = ∑mi=0 Ci

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Break- even analysis

Set NP = 0, solve for Q

Accounting breakeven:

Cash breakeven:

NP = R − VC − FC − DXNP = Q ⋅ (p − v) − FC − DX

Q = FC+DXp−v

Q = FCp−v

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Homework 7A

by RWJ

9/13

Homework 7B

by RWJ

10/13

Homework 7C

by RWJ

11/13

Homework 7D

by RWJ

12/13

Homework 7E

by RWJ

13/13