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Learning Objectives

Learning Objectives. Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO 4 )

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Learning Objectives

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  1. Learning Objectives • Appraise the use of the cost of capital as the discount rate in capital budgeting analysis. (LO4) • Integrate the cash flows that result from an investment decision, including the after tax operating benefits and the tax shield benefits of capital cost allowance (amortization). (LO5) • Perform NPV analysis to assist in the decision-making process concerning long-run investments. (LO6)

  2. LO4 Table 12-5Internal rate of return and net present value ($10,000 investment)

  3. LO4 Net Present Value Profile – a graph of the NPV of a project at 3 different discount rates: • a zero discount rate • the normal discount rate (or cost of capital) • the IRR for the investment – allows an easy way to visualize whether or not an investment should be undertaken

  4. LO4 Net present value ($) 6,000 4,000 2,000 0 Investment B IRRB = 14.33% Investment A 5% 10% 15% 20% 25% IRRA = 11.16% Discount rate (percent) Figure 12-2Net Present Value Profile B A A B

  5. LO4 Net present value ($) 6,000 4,000 2,000 0 Investment B Investment C Investment C IRRC = 22.49% Investment B 15% 10% 20% 25% 5% IRRB = 14.33% Crossover point Discount rate (percent) Figure 12-3Net Present Value Profile With Crossover B C 8.7% C B

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