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Ch 6 Project Analysis Under
Certainty
Methods of evaluating projects when
the future is assumed to be certain.
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Introduction
The ideal investment decision making technique
is Net Present Value.
N P V measures the equivalent present wealth
contributed by the investment.
NPV is given in
NPV -- relates directly to the firm’s goal of
wealth maximization
-- employs the time value of money
-- can be used in all types of investments
-- can be adjusted to incorporate risk.
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Other Project Evaluation Techniques:
Slide I
Discounted Cash Flow Techniques
Internal Rate of Return – calculates the
discount rate that gives the project an
NPV of $0. If the IRR is greater than
the required rate, the project is
accepted. IRR is given as % pa.
IO
IRR
CF
IRR
CF
NPV
−
+
+
+
=
......
)1()1(
)(0$
2
2
1
1
4
Other Project Evaluation Techniques:
Slide II
Modified Internal Rate of Return – calculates
the discount rate that gives the project an NPV
of $0, when future cash flows can be re-invested
at the Re-Investment Rate, a rate different from
the IRR. If the MIRR is greater that the
required rate, the project is accepted. MIRR is
given as % pa.
IO
IRR
RIRCF
IRR
RIRCF
NPV
nn
−
+
+×
+
+
+×
=
−
......
)1(
)1(
)1(
)1(
)(0$
2
)1(
2
1
1
5
Other Project Evaluation Techniques:
Slide III
Non-Discounted Cash Flow Techniques
Accounting Rate of Return- measures the ratio of
annual average accounting income to an asset base
value. ARR is given as % pa.
= % pa.
Payback Period – measures the length of time
required to retrieve the initial cash outlay.
PB is given as number of years.