This document discusses various criteria for evaluating investment decisions: net present value, internal rate of return, discounted payback period, payback period, and break-even analysis. It provides definitions and formulas for calculating each, such as using net present value to determine if the NPV of an investment is greater than $0, or using internal rate of return to find the rate that results in an NPV of $0. Homework assignments 7A through 7E are also listed.

1. Decision Making
Criteria
D Keck
October 3, 2016

2. Decision making criteria
Net present value
Internal rate of return
Discounted payback period
Payback period
Break-even analysis
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3. Present Value
PV = ∑n
i=1
Ci
(1+k)i
NPV = PV + C0
NPV = ∑n
i=0
Ci
(1+k)i
3/13

4. Net present value criterion
Is the NPV of the investment greater than $0 ?
NPV > ∑n
i=0
Ci
(1+k)i
4/13

5. Internal rate of return
criterion
What is the investment rate of return, IRR, that
results in a NPV of $0 ?
NPV = ∑n
i=0
Ci
(1+k)i
0 = ∑n
i=0
Ci
(1+IRR)i
5/13

6. Discounted payback period
criterion
How many periods, m, does the investment
require to have a NPV equal to $0?
NPV = ∑n
i=0
Ci
(1+k)i
0 = ∑m
i=0
Ci
(1+k)i
6/13

7. Payback period criterion
How many periods, m, does the investment
require to have a NPV equal to $0?
NPV = ∑n
i=0
Ci
(1+k)i
0 = ∑m
i=0 Ci
7/13

8. Break- even analysis
Set NP = 0, solve for Q
Accounting breakeven:
Cash breakeven:
NP = R − VC − FC − DX
NP = Q ⋅ (p − v) − FC − DX
Q = FC+DX
p−v
Q = FC
p−v
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9. Homework 7A
by RWJ
9/13

10. Homework 7B
by RWJ
10/13

11. Homework 7C
by RWJ
11/13

12. Homework 7D
by RWJ
12/13

13. Homework 7E
by RWJ
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