Investment Decision Rules

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Do curso por Emory University

Finance for Non-Financial Managers

35 ratings

Emory University

Finance for Non-Financial Managers

35 ratings

Finance is for “Non-financial Managers” who want to understand key financial principles and apply them in a real-world context. Over the course of the program window, you will work your way through a series of nine modules that move from understanding basic financial principles to applying financial analysis and ratios to drive decisions. In addition, each module is capped with an ending self-evaluation to ensure that you have absorbed the following key learning objectives: + Understand the language associated with finance + Know how and when to use financial terms and analysis techniques + Read and assess company performance using financial statements + Recognize the link between organizational strategy and financial objectives + Use "the numbers" to your best advantage to make more informed decisions

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Investment Decision Techniques

This module will demonstrate a variety of investment decision techniques.

Investment Decision Techniques2:52

Investment Decision Rules4:31

Net Present Value3:13

Payback Period6:55

Average Accounting Rate of Return3:44

Internal Rate of Return3:37

Profitability Index2:22

Investment Decision Rules Activity1:01

Investment Decision Rules - IRR Example 113:03

Investment Decision Rules - IRR Example 21:22

Investment Decision Rules - Payback Period Example4:22

Investment Decision Rules - Average Accounting Rate of Return Example1:17

Investment Decision Rules - Profitability Index Example1:13

Conheça os instrutores

Thomas Smith
Assistant Professor in the Practice of Finance
Goizueta Business School

Investment decision rules, these are rules or

techniques that organizations use, can use.

To determine whether or not they should invest in a particular asset,

whether they should merge or acquire a different company.

Whether they should engage in capital expenditures.

Your organization probably uses one or more of these rules

when determining whether or not they should engaged in CapX.

And we're going to talk through briefly what the different rules are right now.

And then we're going to talk more in depth about the calculations

of each one of these different techniques.

Net present value, we've talked about net present value.

This is the present value, the discounted value of your future streams of income,

net of your initial cost.

As in terms of an investment technique, you would then look at one or

more investment opportunities and identify the opportunity that has the highest NPV.

The greatest net present value.

You could look at an individual investment and

identify whether its NPV is positive or negative.

You'd want to take an investment on if NPV is positive and

probably not if it's negative.

Or if looking at more than one ,choose the investment that has the highest net

present value.

The payback period, both discounted and undiscounted.

There's a way to capture and measure the number of years or the number of periods

that it's going to take for the investment to recoup the initial cost.

So let's suppose that I have a capital expenditure that's going to cost me

a million dollars.

I might use the payback period to identify whether I'm going to get my million

dollars back in 12 months, or 16 months, or

18 months, 24 months, 2 years, 3 years.

And I may set up a decision technique tree that says I will or won't

engage in a particular investment unless I can get my money back in two years.

In this scenario,

I would probably choose the investment that I get my money back sooner.

So I would choose a capital expenditure project where the payback period is two

years relative to two and a half years, or three years relative to five years.

The average accounting rate of return is a technique where we use

not only the discounted or we can use the discounted stream.

But we also account for the fact that we've got taxes and

that we haveaA depreciation schedule in place for our capital.

And so what we want to do is we want to account for depreciation, account for

our taxes.

And identify the rate of return once we have engaged

in the accounting practices involved in that particular investment.

The internal rate of return is a technique where we have to capture and

calculate the rate of return, the discount rate such

that the NPV and our future cash flows are even.

So we ask the question what is the discount rate such that our NPV is zero.

Or that our costs are exactly equal to our discounted stream of future cash flows.

Then we can choose the investment with the highest internal rate of return.

We also have this thing called profitability index.

The profitability index Is where we're taking our present value,

our discounted stream as a ratio of our initial cost.

Each one of these techniques has its pluses and

its minuses, our pros and our cons.

But we can use them in concert or individually to make good decisions.

Good finance leads to good decisions.

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