清华大学公司财务讲义4.pptVIP

8.* The IRR rule is very important. Management, and individuals in general, often have a much better feel for percent returns and the value that is created, than they do for dollar increases. A dollar increase doesn’t seem to provide as much information if we don’t know what the initial expenditure was. 8.* This example will be used for each of the decision rules so that the students can compare the different rules and see that conflicts can arise. This illustrates the importance of recognizing which decision rules provide the best information for making decisions that will increase owner wealth. 8.* Many of the financial calculators will compute the IRR as soon as it is pressed; others require that you press compute. 8.* The answer to all of these questions is yes, although it is not always as obvious. The IRR rule accounts for time value because it is finding the rate of return that equates all of the cash flows on a time value basis. The IRR rule accounts for the risk of the cash flows because you compare it to the required return, which is determined by the risk of the project. The IRR rule provides an indication of value because we will always increase value if we can earn a return greater than our required return. We should consider the IRR rule as our primary decision criteria, but as we will see, it has some problems that the NPV does not have. That is why we end up choosing the NPV as our ultimate decision rule. 8.* You should point out, however, that if you get a very large IRR that you should go back and look at your cash flow estimation again. In competitive markets, extremely high IRRs should be rare. 8.* So what should we do – we have two rules that indicate to accept and two that indicate to reject. 8.* Click on the Excel icon to go to an embedded spreadsheet so that you can illustrate how to compute IRR on the spreadsheet. 8.* NPV = 132,000 / 1.15 + 100,000 / (1.15)2 – 150,000 / (1.15)3 – 90,000 = 1,769.54 Calculator: CF0 = -90,000; C01 = 132,000;