2. Copyright © 2008 Pearson Education Canada16-1 Chapter 16 Investment Decision Applications Contemporary Business Mathematics With Canadian Applications Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs PowerPoint: D. Johnston

3. Copyright © 2008 Pearson Education Canada16-2 Objectives After completing chapter sixteen, the student will be able to: Determine the discounted value of cash flows and choose between alternative investments on this basis. Determine the net present value of a capital investment project and determine whether the project is feasible. Compute the rate of return on an investment.

4. Copyright © 2008 Pearson Education Canada16-3 Evaluation of Capital Expenditures Discounted Cash Flow Estimate all anticipated future cash flows generated by the investment. Project an interest rate. Calculate the present value of the cash flows using the projected interest rate.

5. Copyright © 2008 Pearson Education Canada16-4 Discounted Cash Flows Bird-in-the-hand principle--Given that all other factors are equal, earlier benefits are preferable to later benefits. The-bigger-the-better principle--Given that all other factors are equal, bigger benefits are preferable to smaller benefits.

6. Copyright © 2008 Pearson Education Canada16-5 Discounted Cash Flow Example

7. Copyright © 2008 Pearson Education Canada16-6 Find PV of Each Cash Flow

8. Copyright © 2008 Pearson Education Canada16-7 Net Present Value

9. Copyright © 2008 Pearson Education Canada16-8 Example of Net Present Value

10. Copyright © 2008 Pearson Education Canada16-9 Cash Inflows

11. Copyright © 2008 Pearson Education Canada16-10 Finding PV of Cash Inflows

12. Copyright © 2008 Pearson Education Canada16-11 Find NPV of Each Cash Flow

13. Copyright © 2008 Pearson Education Canada16-12 Assumptions for NPV

14. Copyright © 2008 Pearson Education Canada16-13 Criterion Rule for NPV

15. Copyright © 2008 Pearson Education Canada16-14 Finding Rate of Return on Investment (R.O.I.)

16. Copyright © 2008 Pearson Education Canada16-15 R.O.I.

17. Copyright © 2008 Pearson Education Canada16-16 Profitability Index

18. Copyright © 2008 Pearson Education Canada16-17 Profitability Index and R.O.I.

19. Copyright © 2008 Pearson Education Canada16-18 Methods for Calculating R.O.I.

20. Copyright © 2008 Pearson Education Canada16-19 Return and Risk High risk/high yield choices include derivatives, commodities, precious metals, common stocks, and growth stocks. Moderate risk/moderate yield choices include mutual funds, real estate,corporate bonds, and preferred stocks. Low risk/low yield choices include savings accounts, Canada savings bonds, and GICs.

21. Copyright © 2008 Pearson Education Canada16-20 Summary