Project Selection Rules for NPV and IRR
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One Project
-NPV: invest is NPV is greater than 0
-IRR: invest if r is less than IRR
Comparing One Time Projects
-Project A + B
Independent Projects: Project A and Project B
-take all good projects
-NPV: take projects with highest NPV (if NPV is greater than 0)
-IRR: take project with largest IRR (r is less than IRR)
What weaknesses do you see in its calculations?
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Beta= regression coefficient
x: returns on S&P 500
y: returns on individual stock
Historical spread b/w market returns and debt
Problem: using the past to predict the future
HIGH non diversifiable risk
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HIGH return
IRR (Pros/Cons)
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Pros:
-Easy to explain
Cons:
-Doesn't use cost of capital
-Assume a cash flows are reinvested at IRR rate (unrealistic)
Correlation falls between...
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, -1 and 1
The greater the variance,
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then the greater the volatility or risk of the investment
Beta=1.00
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same risk as average investment; moves the same as market on average
IPO: Initial Public Offering
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higher success in a Bull Market (everything sells for higher prices) ; market
high, the amount of of IPO's increase
Zero Correlation
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Give this one a try later!
One Project
-NPV: invest is NPV is greater than 0
-IRR: invest if r is less than IRR
Comparing One Time Projects
-Project A + B
Independent Projects: Project A and Project B
-take all good projects
-NPV: take projects with highest NPV (if NPV is greater than 0)
-IRR: take project with largest IRR (r is less than IRR)
What weaknesses do you see in its calculations?
,Give this one a try later!
Beta= regression coefficient
x: returns on S&P 500
y: returns on individual stock
Historical spread b/w market returns and debt
Problem: using the past to predict the future
HIGH non diversifiable risk
Give this one a try later!
HIGH return
IRR (Pros/Cons)
Give this one a try later!
Pros:
-Easy to explain
Cons:
-Doesn't use cost of capital
-Assume a cash flows are reinvested at IRR rate (unrealistic)
Correlation falls between...
Give this one a try later!
, -1 and 1
The greater the variance,
Give this one a try later!
then the greater the volatility or risk of the investment
Beta=1.00
Give this one a try later!
same risk as average investment; moves the same as market on average
IPO: Initial Public Offering
Give this one a try later!
higher success in a Bull Market (everything sells for higher prices) ; market
high, the amount of of IPO's increase
Zero Correlation
Give this one a try later!
