Project Appraisal

1
Project Appraisal

• Net Present Value
• NPV present value of expected cash inflows less
  the present value of cash outflows.
• Discount rate cost of capital to the firm
  conducting project.
• Accept if NPV gt 0

• Internal Rate of Return
• IRR the discount rate which gives NPV 0.
• Use financial calculator to solve.
• We accept a project if its IRR exceeds the
  opportunity cost of capital (the hurdle rate).

NPV dominates IRR whenever there is a
conflict IRR can give the wrong decision when
projects are mutually exclusive or cash flows
change sign gt once
2
Performance Evaluation

• Money Weighted Rate of Return
• Money weighted rate of return IRR of a series
  of cash flows.
• It takes account of all cash inflows and outflows
  of a portfolio.

• Time-Weighted Rate of Return
• (based on HPR)
• Time-weighted rate of return compound rate of
  growth of 1 initially invested in a portfolio
  over a stated measurement period.
• Not affected by investor determined cash
  withdrawals and additions to the portfolio.

Preferred performance measure of the investment
management industry
3
Money Market Yields

• Bank Discount Basis

• Effective Annual Yield

• Money Market Yield
• or

Holding Period Yield
Where D the dollar discount (capital gain) F
the face value of the T-bill t the number
of days until maturity 360 bank convention of
number of days in a year
Bond Equivalent Yield 2 x semiannual yield to
maturity