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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Net Present Value and Other Investment Criteria

Learning Objectives

After studying this chapter in the textbook, you should be able to:

Compute the net present value (NPV) of a series of cash flows.

Compute the ordinary and discounted payback.

List the pros and cons of the payback criterion.

Define the average accounting return (AAR) and explain what its main drawback is.

Compute the internal rate of return (IRR) for a project and list its two key shortcomings.

Define and be able to calculate the crossover rate between two projects.

Compute the profitability index and specify the situation in which it is may be preferred over the NPV.

Outline the key reasons why the NPV is generally considered to be the preferred investment criterion.

2002 McGraw-Hill Higher Education
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