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<h2 class="hd hd-2 unit-title">Link to Capital Budgeting</h2>
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<h2 class="hd hd-2 unit-title">Maximizing Shareholder Wealth</h2>
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<h3 class="hd hd-2">Maximizing Shareholder Wealth </h3>
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<h2 class="hd hd-2 unit-title">NPV Rule</h2>
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<h3 class="hd hd-2">NPV Rule</h3>
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<h2 class="hd hd-2 unit-title">Application to Gene Therapy</h2>
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<h3 class="hd hd-2">Application to Gene Therapy</h3>
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<h2 class="hd hd-2 unit-title">Brief Digression on Accounting</h2>
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<h2 class="hd hd-2 unit-title">Exercise: NPV Rule</h2>
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Exercise: NPV Rule
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<p>What is the correct NPV rule if you have:</p>
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<p>A single project:</p>
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<option value="option_0c351fdf5b4d410694afd94cd3907bd9_2_1_dummy_default">Select an option</option>
<option value="Take the project if and only if the NPV of the project is positive"> Take the project if and only if the NPV of the project is positive</option>
<option value="Take the project if and only if the NPV of the project is negative"> Take the project if and only if the NPV of the project is negative</option>
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<p>Many independent projects:</p>
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<option value="option_0c351fdf5b4d410694afd94cd3907bd9_3_1_dummy_default">Select an option</option>
<option value="Take the project with the highest NPV"> Take the project with the highest NPV</option>
<option value="Take the project with the highest positive NPV"> Take the project with the highest positive NPV</option>
<option value="Take all projects with positive NPV"> Take all projects with positive NPV</option>
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<p>Many mutually exclusive projects (i.e., you can only pick one):</p>
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<option value="option_0c351fdf5b4d410694afd94cd3907bd9_4_1_dummy_default">Select an option</option>
<option value="Take the project with the highest NPV"> Take the project with the highest NPV</option>
<option value="Take the project with the highest positive NPV"> Take the project with the highest positive NPV</option>
<option value="Take all projects with positive NPV"> Take all projects with positive NPV</option>
</select>
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</li>
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<h2 class="hd hd-2 unit-title">Exercise: Expansion Decision</h2>
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Exercise: Expansion Decision
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DEF Pharmaceuticals is trying to decide whether to undertake an expansion of its production facilities. The expansion will cost $8.5 million, to be paid immediately. After tax cash flows generated by the expansion are projected to be $1 million next year, and will be growing indefinitely with inflation at 2.5% per year. Assume a nominal discount rate of 13.4%. Should DEF undertake the expansion?</p>
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<h2 class="hd hd-2 unit-title">Exercise: Practical Considerations</h2>
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Capital Expenditure, Sunk Costs &amp; Working Capital
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<div class="wrapper-problem-response" tabindex="-1" aria-label="Question 1" role="group"><p>Which of the following should you take into account when calculating future cash flows:</p>
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<h2 class="hd hd-2 unit-title">Alternatives to NPV</h2>
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<h2 class="hd hd-2 unit-title">Internal Rate of Return</h2>
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<h3 class="hd hd-2">Internal Rate of Return</h3>
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<h2 class="hd hd-2 unit-title">Interactive: IRR</h2>
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<p style="text-align: left;">The graph below shows the internal rate of return (IRR) of a project with an initial investment of $3 million and 5 years of subsequent cash flows. What happens to the IRR (i.e., the discount rate that makes the NPV of the project equal to $0) as you change the cash flows?</p>
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<h2 class="hd hd-2 unit-title">Exercise: IRR</h2>
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Exercise: IRR
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You are planning to invest $3 million today (year 0) in a project that is projected to yield the following future cash flows: </p>
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<th>Year</th>
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1</th>
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2</th>
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3</th>
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4</th>
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5</th>
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Cash flows ($ million)</td>
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+1.5 </td>
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+1.3 </td>
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+1.05 </td>
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+0.9 </td>
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+0.75 </td>
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What is the internal rate of return for this project? Feel free to use Excel, or any online calculator such as <a href="https://www.wolframalpha.com/input/?i=irr">WolframAlpha</a>.
(<i>Note</i>: Your answer should be a number in percentage form. Do not enter %.)
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