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Project Appraisal

Project Appraisal. Net Present Value NPV = present value of expected cash inflows less the present value of cash outflows. Discount rate = cost of capital to the firm conducting project. Accept if NPV > 0. Internal Rate of Return IRR = the discount rate which gives NPV = 0.

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Project Appraisal

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  1. Project Appraisal • Net Present Value • NPV = present value of expected cash inflows less the present value of cash outflows. • Discount rate = cost of capital to the firm conducting project. • Accept if NPV > 0 • Internal Rate of Return • IRR = the discount rate which gives NPV = 0. • Use financial calculator to solve. • We accept a project if its IRR exceeds the opportunity cost of capital (the hurdle rate). NPV dominates IRR whenever there is a conflict IRR can give the “wrong” decision when projects are mutually exclusive or cash flows change sign > once

  2. Performance Evaluation • Money Weighted Rate of Return • Money weighted rate of return = IRR of a series of cash flows. • It takes account of all cash inflows and outflows of a portfolio. • Time-Weighted Rate of Return • (based on HPR) • Time-weighted rate of return = compound rate of growth of $1 initially invested in a portfolio over a stated measurement period. • Not affected by investor determined cash withdrawals and additions to the portfolio. Preferred performance measure of the investment management industry

  3. Money Market Yields • Bank Discount Basis • Effective Annual Yield • Money Market Yield • or Holding Period Yield Where: D = the dollar discount (capital gain) F = the face value of the T-bill t = the number of days until maturity 360 = bank convention of number of days in a year Bond Equivalent Yield = 2 x semiannual yield to maturity

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