Principles of Managerial Accounting · free preview
Discounted Cash Flow Models, Net Present Value and Internal Rate of Return
Net present value sums discounted cash flows net of the investment and accepts positive projects, while internal rate of return finds the discount rate that zeroes the same flows, accepting projects whose rate exceeds the cost of capital.
1. Net present value
Net present value
2. Internal rate of return
Internal rate of return
3. When the two disagree
When the two disagree
4. Choosing the discount rate
Choosing the discount rate
5. NPV computation
Discounted inflows are 113,724 dollars and the investment is 100,000 dollars. Compute net present value.
6. NPV decision rule
What does a positive NPV indicate? Use the figures from the worked example in this lesson and state the result in the requested units.
7. IRR definition
What is the internal rate of return? Use the figures from the worked example in this lesson and state the result in the requested units.
8. Conflict resolution
NPV and IRR rank two mutually exclusive projects differently. Which method should decide?
9. Reinvestment assumption difference
NPV assumes reinvestment at the cost of capital, while IRR assumes reinvestment at the ____. One word.
10. Discount rate ownership
The ____ function typically owns the cost of capital used as the discount rate. One word.
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