Apple iCar project – Aswath Damodaran – Session 14 (MBA): To NPV and beyond..

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Apple iCar project - Published on Mar 28, 2016

We started today's class by looking at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR.
We then compared projects with different lives and considered how best to incorporate side costs and side benefits into investment analysis. In the meantime, you have all of the tools you need to address the Apple iCar project. Please send your group project report as a pdf file with “The Coolest Car Ever" as the subject before class on Wednesday. Please put the decision you made on the investment (Accept or Reject), the cost of capital that you used and the NPV of the project on the cover page. Also, please fill out the attached spreadsheet with your numbers and send them back to me when you have them (or as early as you can). Until next time!

Aswath Damodaran
[email protected]
http://www.damodaran.com

We started this class by first looking at how to deice which risks to hedge and which ones to pass through and then looked at acquisition valuation. We then looked at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR. We then compared projects with different lives and considered how best to incorporate side costs and side benefits into investment analysis.
Slides: http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/~adamodar/pd...
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd...


Apple iCar project