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PRERNA
 SCENE

ANI›ATED

›AIN CONCEPTS OF THE PROJECT

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 arge investment in plant or equipment

with returns over a period of time.

 Investment may take place over a period of time

 A Strategic Investment Decision

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! Expansion

! Improvement

! Replacement

! R&D

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To maximise shareholders wealth..

Projects should give a return over and above the

marginal weighted average cost of capital.

Projects can be;

! ›utually exclusive
! Independent

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ëill:-
D Select the project that maximises shareholders wealth

D Consider all cash flows

D Discount the cash flows at the appropriate market

determined opportunity cost of capital

D ëill allow managers to consider each project

independently from all others
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! Ô. Estimate the cash flows.
! 2. Assess the riskiness of the cash flows.
! 3. Determine the appropriate discount rate.
! 4. Find the PV of the expected cash flows.
! 5. Accept the project if PV of inflows > costs.


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! Payback

! Internal Rate of Return (IRR)

! Net Present Value (NPV)

! Profitability Index

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Project A Ô





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! · The IRR is the discount rate at which the NPV for a
project equals zero. This rate means that the present
value of the cash inflows for the project would equal
the present value of its outflows.
! · The IRR is the break-even discount rate.
! · The IRR is found by trial and error.

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! Discount cash inflows to their present value and
then compare with capital outlay required by the
investment
! Discount rate (hurdle rate or required rate of
return) - required minimum rate of return given
riskiness of investment
! Proposal is acceptable when NPV is ϑ zero
! The higher the NPV the more attractive the
investment

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PROFITABILITY INDEX (PI)

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      ! or PI method compares the present
value of future cash inflows with the initial investment on a
relative basis. Therefore the PI is the ratio of the present
value of cash flows (PVCF) to the initial investment of the
project.

PI= PVCF/Initial Investment

In this method a project with a PI greater than Ô is accepted

but a project is rejected when its PI is less than Ô
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