© K. Cuthbertson and D. Nitzsche Figures for Chapter 3 INVESTMENT APPRAISAL (Investments : Spot and Derivatives Markets)

© K. Cuthbertson and D. Nitzsche Figure 3.1 : Cash flows for Vito’s deli 0 12 Time $ 1210$ $ 2100

© K. Cuthbertson and D. Nitzsche Figure 3.2 : NPV and the discount rate Discount (loan) rate NPV 0 8%10%12% Internal rate of return

© K. Cuthbertson and D. Nitzsche Figure 3.3 : Project A : Normal cash flows Loan rate or discount rate NPV 0 r50% IRR = 50% r = loan rate Invest if IRR > r Cash flows : -, +, +, …, +

© K. Cuthbertson and D. Nitzsche Loan rate or discount rate NPV 0 r50% IRR = 50% r = loan rate Invest if IRR < r Cash flows : +, +, …, -, - Figure 3.4 : Project B : Rolling Stones concert

© K. Cuthbertson and D. Nitzsche Figure 3.5 : Project C : open-cast mining Loan rate or discount rate NPV 0 20% Multiple IRR = 20% and 25% r = loan rate 25% Cash flows : -, +, …, -

© K. Cuthbertson and D. Nitzsche Discount (loan) rate NPV % 18.36% 33.15% NPV L > NPV E Project L Project E Switching point NPV L < NPV E Figure 3.6 : Mutually exclusive projects - timing problem

© K. Cuthbertson and D. Nitzsche We have the choice to abandon the project at t = 1. S D U Abandon AV 1 = 50 Do not abandon NPV 1 U = 150 UU UD Abandon AV 1 = 50 Do not abandon NPV 1 D = 150 p d = 0.25 p u = 0.75 p u|u p d|u DU DD p u|d p d|d Figure 3.7 : Decision tree : abandonment possible