《《Investment Appraisal LC I》.ppt

IRR TECHNICAL PROBLEMS NPV Project F: NPV Graph 33.33% 100% Discount Rate When unconventional cashflows consider using NPV. Weaknesses of IRR Using IRR does NOT relieve management of the need to know the firm’s cost of capital. If managers DON’T have a “yardstick” minimum acceptable return to measure projects by, how are they to know whether any given IRR is in fact a return worth having? If managers DO have a minimum acceptable return, why mess around with IRR when it is, demonstrably, a less reliable method than NPV? THANK YOU PATRICK WYLIE Room B26email: wyliejp@cardiff.ac.uk * * * * Investment Appraisal Cashflows Look at cashflows out and cashflows in. Only interested in relevant cashflows. Incremental Costs Opportunity Costs WORKING CAPITAL Changes in working capital must be taken into account when appraising projects. Net working capital increases that result from a project (more debtors and stock, minus creditors) are in effect an investment of cash, so relevant and treated as a cash outflow when the increase takes place. When the working capital is liquidated at the end of the project this is treated as a cash inflow. WORKING CAPITAL Wiggins is planning to open a mobile burger bar outside Cardiff stadium during the five weeks of the Six Nations. Hire of the burger bar requires a ￡10,000 bond, the bond is fully refundable when the bar is returned. To open the bar initial stock of ￡5,000 will have to be purchased and paid for. At the end of the five weeks any unsold stock will have to be binned, Wiggins estimates that ￡500 of stock will remain unsold and have to be binned at the end of the five weeks. A cash float of ￡1,000 is required and Wiggins estimates that ￡100 will be lost due to theft. What is Wiggin’s initial working capital cash outflow? What is Wiggin’s working capital cash inflow recovered at the end of the five weeks? WORKING CAPITAL Initial Recovered