FINC 300 1st Edition Lecture 15Outline of Last Lecture I. Dividend Discount ModelII. Constant Dividend Growth ModelIII. Total Payout ModelOutline of Current Lecture I. Profitability IndexII. Rule of FinanceIII. Cash Flow CalculatorCurrent LectureCh. 8 Investment DecisionsThe Valuation Principle, an ongoing theme in this text, is further clarified with the introduction of the Net Present Value (NPV) Rule. Along with the NPV, other methods of making investment decisions are explored. Comparisons are drawn between the NPV rule and internal rate of return (IRR) to determine which yields the optimal decision. It is proven that the IRR does not always yield the best decision, as does the NPV, especially in the case of mutually exclusive projects. There are two important components to NPV estimation - the accuracy of cash flow estimation and the accuracy of the discount rate used. There may be uncertainty regarding the project’s cost of capital discount rate so it is helpful to consider how the NPV will be affected by varied discount rates using a Profitability Index, a graph of a project’s NPV over a range of discount rates. - Profitability Index= NPVInitial Investment “Bang for your Buck”Golden Rule of Finance: When evaluating mutually exclusive projects (when you can only accept one of competing projects), choose the one with the highest profitability index. There are two important components to NPV estimation - the accuracy of cash flow estimation and the accuracy of the discount rate used. *We can also find the NPV, using the NPV function and Cash Flow keys in our calculators. - CFo = 28,000 +|- Enter CPT - CO1 = 6500 Enter These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- FO1 = 5 Enter - NPV I= - CPT