decision making criteria
TRANSCRIPT
Decision MakingCriteriaD Keck
October 3, 2016
Decision making criteria
Net present value
Internal rate of return
Discounted payback period
Payback period
Break-even analysis
·
·
·
·
·
2/13
Present Value
PV = ∑ni=1
Ci
(1+k)i
NPV = PV + C0
NPV = ∑ni=0
Ci
(1+k)i
3/13
Net present value criterion
Is the NPV of the investment greater than $0 ?
NPV > ∑ni=0
Ci
(1+k)i
4/13
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
5/13
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
6/13
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
7/13
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
8/13
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